Legal Problems in Realizing Non-Performing Loans of Banks in Ethiopia
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Date
2009-12
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Addis Ababa University
Abstract
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.
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Keywords
Legal Problems,Realizing Non-Performing Loans, Banks in Ethiopia