Determinants of Non- performing Loans in Ethiopia Private Commercial Banks: With Emphasis on Domestic Trade and Service and Export Sectors
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Date
2020-02
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A.A.U
Abstract
Bank profitability and sustainability can only be provided through a proper flow of interest income generated through the lending function of banks. However, since banks are no longer able to generate enough interest income through classical safe credit and are required to maintain reserves in the form of provisions to cover for eventual loan losses, bank capital decreases together with their health, which is becoming weak, increasing the trend of NPLs. The issue of non-performing loans is one of the factors that reflect the soundness of the banking sector. This study examine the determinants of NPLs in Ethiopian private commercial bank in the period of 2016 to 2018. Specifically the study sought to establish the effect of macroeconomic variables (exchange rate and real interest rate), bank specific (capital adequacy ratio, loan to deposit ratio, loan growth rate of DTS sector, loan growth rate of export sector and credit monitoring and follow-up) and business characteristic (nature of business). The study used primary and secondary data collected from all private commercial banks in Ethiopia. The study use mixed methods research approach by combining documentary analysis and in-depth interviews. Explanatory research is conducted in order to identify the relationships between dependent and independent variables and panel data is analyzed using econometric regression analysis to establish the significance of the relationship. The findings of the study show that exchange rate and loan growth rate of export sector has a positive and significant relationship between NPLs of EPCBs. Furthermore, capital adequacy ratio, loan growth rate of DTS sector and nature of the business has negative significant relationship with banks’ NPLs. On the other hand, variables like real interest rate and loan to deposit ratio has negative and statistically insignificant relationship between NPLs of Ethiopian private commercial Banks. Therefore, the study suggest that to reduce the occurrence of loan default the Bank should strengthen its applicant screening criteria and due diligence assessment to select potential risk taking applicants and review appropriate pre and post credit risk assessments. Besides, all private commercial banks need to make sure that borrowed funds are being used for the intended purpose through enhanced credit monitoring.
Description
A Thesis submitted in, Partial fulfillment of the requirements of the award of the Degree of Master of Science in Accounting & Finance
Keywords
Bank specific factors, Business characteristics, Macroeconomic factors, Non-Performing Loans