Assessing Factors that Affect Non-Performing Loan in Ethiopian Commercial Banks: A Case of Selected Commercial Banks

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Date

2024-02-01

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A.A.U

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The study aims to assess the major bank specific, customer specific and macro factors that affect Nonperforming loans in case of 5 selected commercial banks namely, Commercial bank of Ethiopia, Awash bank, Bank of Abyssinia, Dashen bank and cooperative bank of Oromiya since they are top 5 banks in their asset position and registered highest profit in the fiscal period of 2022G.C. To achieve this objective both descriptive and explanatory research design with mixed research approach was used. A total of 151 samples were selected from the 5 banks who are engaged in credit activity. Interviews and questionnaires were the main data sources used in the data collection process. A range of publications, bank policies and guidelines, online articles, and other textual materials were also examined in order to collect secondary data. Using computer-loaded SPSS software, descriptive statistics such as mean, frequency, percentage, and standard deviation were processed for data analysis. The study result has found that poor credit assessment, credit monitoring, banks profitability which can be associated with aggressive lending, rapid credit growth and bank’s great risk appetite, elongated process of loan approval and fails to have technological advancement as bank specific causes while diversion of loan fund, lack of knowledge and experience of customers about project management and willful default as customer related factors for the existing of loan default. Besides the inflation rate, the level of GDP, political instability and frequent changes of rule and regulations has influence on the rise of NPL. However, the study outcome failed to support the existence of relationship between collateralized lending and interest rate on occurrences of nonperforming loans. In general, according to the study, banks should implement effective due diligence assessment and strong monitoring policies so as to have a better loan portfolio. Moreover the banks should consider the effect of customer related and external influences in availing a loan.

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