THE IMPACT OF NON PERFORMING LOANS ON PROFITABILITY OF ETHIOPIAN PRIVATE COMMERCIAN BANKs

Abstract

This study focuses on the impact of NPL on profitability of Ethiopian private commercial banks. Bank loans have a vital contribution towards development of economy by financing different sectors. However, nonperforming loans are leads to incidence of huge loss on banks profit in particular and country economy in general. Hence, this study was conducted to examine both internal factors (nonperforming loan rate and loan to deposit rate) and external factors (Ethiopian inflation and GDP rate) impact of NPL on bank profitability. To this end, the researcher has selected 7 private banks of Ethiopia. This study used secondary sources of data, which is cover the period 2007- 2016.These data were collected from NBE directives and CSA. Furthermore, a descriptive statics and linear regression model was used to examine the impact of NPLs by using EVIEWS 7. This research is explanatory research design that identifies the cause and effect relationships between the study variables and ROA. According to the findings, the result of bank variables, non-performing loan (NPL), and Loan To Deposit (LTD) were found to have a major impact on ROA of EPCBs, with respect the other variables, inflation rate and GDP were found to be statistically insignificant impact on ROA in EPCBs. In particular, inflation rate had a positive association with the levels of profitability. The findings also suggested a significant the negative relationship among GDP and ROA of EPCBs which indicates whenever there was an increase in GDP rate, the bank need additional income loan to cover the cost paid to deposit, due to this the ROA is goes up. In addition, the effective exchange rate had also a negative association with NPLs of Ethiopian private commercial banks. The finding of this study is significant since once identifying the impact of NPLs might enable management body to make appropriate lending policies that prevent the occurrence of NPLs. Furthermore, the study recommended the bank should emphasize the management of loans to reduce the level of nonperforming loans. Besides, it is better for the loan officers to provide financial counseling to the borrowers on the wise use of loan.