Non-performing Assets and their Impact on Financial Performance of Commercial Banks in Ethiopia
No Thumbnail Available
Date
2015-02
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
Non-performing assets are always a center of concern for banks as well as all in the business
world as a sound financial system, among other things, requires maintenance of a low level of
non-performing assets. In this regard, to control the increasing non-performing assets in
Ethiopian banking sector, the National Bank of Ethiopia issued a directive which strictly
requires all banks to maintain ratio of their non -performing assets below five percent. The
main objective of this study is, therefore, to examine the impact of non-performing assets on
financial performance of Ethiopian commercial banks as increasing trend of non-performing
assets are still a concern of some banks. Research hypothesis is developed which inquires the
relationship and effect of non-performing assets on commercial banks financial performance.
A quantitative approach is employed for the required data collection and a sample of six
commercial banks are selected for data collection on a cross sectional basis for nine years.
The data is then anayzed using descriptive, correlation and regression techniques through
SPSS sofware pachage. .The findings of the study revealed that non-performing assets have
statistically significant negative impact on the financial performance (ROA) of Ethiopian
commercial banks in agreement with the hypothesis. Moreover, loan loss provision and
capital adequacy ratios refleced an inverse and direct causal relationship with financial
performance of commercial banks (ROA) respectively. Therefore, it is recommended that
commercial banks in Ethiopia should enhance their capacity in credit analysis and loan
administration while the regulatory authority should pay more attention to bank’s compliance
to relevant provisions of the bank and other prudential guidelines.
Key words: Non-Performing Assets, Financial performance
Description
Keywords
Non-Performing Assets, Financial performance