Determinants of Ethiopian Private Commercial Banks’ Asset Quality
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Date
2016-04
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Addis Ababa University
Abstract
Both macroeconomic and bank-specific factors affect the occurrence of Non-Performing
Loan; the most suitable proxy for asset quality measurement. This study identifies bank
specific and macroeconomic factors that contribute to these nonperforming loans in
Ethiopian private commercial banks. Six private commercial banks have been the subject
for the study ranging from 2004/2005 to 2012/2013. The bank's financial statement,
National Bank of Ethiopia and Ministry of finance and Economic Cooperation has been
the main source for the study and the panel analysis has been carried out to obtain the
result for this empirical study. The study begins with Hausman test (Random Effect
Model versus Fixed Effect Model) to determine the most suitable model to be used in this
study. The empirical results showed that GDP growth and annual inflation rate are
positively related to non-performing loans, suggesting that private commercial banks
should consider the macro economic factors before extending loans. A negative
relationship of CAR and ROE with the volume of private commercial banks non-
performing loans was also found. Contrary to previous studies, the findings also showed
an insignificant relationship among real lending rate and NPLs of Ethiopian private
commercial banks.
Keywords: Non-performing loans; Macroeconomic determinants; Bank specific
determinants
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Keywords
Non-performing loans, Macroeconomic determinants, Bank specific determinants