Legal Problems in Realizing Non-Performing Loans of Banks in Ethiopia

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Addis Ababa University


A sound financial system presupposes legislations relating to banking and its supervisions. These legislations should cover different activities of banks including the amount of non-performing loans. Non-performing loans are one of the determinant factors for the soundness of the banking sector. That is why integral legal and institutional framework needs to be in place. Accordingly, this study was conducted to evaluate the problems faced by banks in resolution of non-performing loans. The paper aimed to provide a general idea on the legal framework for recovering non- performing loans in Ethiopia and the practical problems. The study employed secondary data from books, reports, journals and internet sources as well as primary data from interviews. Interviews were conducted in private and government banks. Cases were also collected and analyzed to show the problems in resolution of non-performing loans. Different Ethiopian legislations which have direct relation with the matters were assessed especially with respect to priority rights and procedures in realizing the securities for non-performing loans. The finding of the study indicated that legal gaps that exist in procedural laws and also institutional problems affect the resolution process. Lack of laws to protect financial securities such as Financial Guarantee Bonds and Negotiable Instruments mostly confined the credit system to collateral based credit system. Accordingly, the study recommends that amendments in procedural laws should be made. Furthermore, issuing appropriate laws covering financial securities, establishing a comprehensive institutional framework including Asset Management Companies (AMCs) with clear accountability and transparency are found to be very important.



Legal Problems,Realizing Non-Performing Loans, Banks in Ethiopia