THE IMPACT OF NON PERFORMING LOANS ON PROFITABILITY OF ETHIOPIAN COMMERCIAN BANKS

Abstract

This study focuses on the impact of non peforming loan on profitability of Ethiopian commercial banks. Bank loans have a vital contribution towards development of economy by financing different type of sectors. However, nonperforming loans were 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 factor of (nonperforming loan rate, management effiviency,capital aduquacy 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 banks of Ethiopia. This study used secondary sources of data, which was cover the period 2010- 2018.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 8. This research was explanatory research designed that identifies the cause and effect relationships between the study variables and ROA. According to the findings, the result of bank variables, gorss domestic product (GDP), and capital aduquacy (CA) were found to have a major impact on ROA of EPCBs, with respect the other variables, inflation rate and management efficiency(ME),loan to deposit ratio(LTR) and non performing loan(NPL) were found to be statistically insignificant impact on ROA in EPCBs. In particular, capital aduquacy had a positive association with the levels of profitability. In addition, the effective exchange rate had also a negative association with NPLs of Ethiopian commercial banks. The finding of this study was 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 was better for the loan officers to provide financial counseling to the borrowers on the wise use of loan