DETERMINANTS OF NON-PERFORMING LOAN: IN CASES OF COMMERCIAL BANKS OF ETHIOPIA

Abstract

The main goal of Ethiopian commercial banks is to operate profitability in order to maintain economics stability and improve growth and sustainability. However, Ethiopian commercial banks experience high levels of Non-performing loans. This trend threatens viability and sustainability of banks and hinders the achievement of their goals. This study aimed to examine the determinants of Non-performing loans. Specifically, the study to examine the effect of macroeconomic variables (Growth domestic product, and annual inflation rate), and bank specific variables (loan to deposit ratio, Capital Adequacy Ratio, Profitability and Bank Size). The study used secondary data. The target population of the study comprises all Ethiopian commercial banks. And also the study used explanatory research design with a quantitative research approach by combining documentary analysis (structured review of documents). More specifically, the study reviews the financial records of ten commercial banks from the total target population for the period 10 years from the year 2009 to 2018. The study used panel data. The collected panel data is analyzed using descriptive statics, correlation matrix, normality test and multiple linear regression analysis by using Eviews 8 software program. The findings of the study show that, loan to deposit ratio, and Bank Size were statistically significant relationship with banks’ NPLs. On the other hand, variables like Profitability, Growth domestic product, Capital Adequacy Ratio and annual inflation rate were found to be statistically insignificant. Base on the finding the study recommended that the future researches should investigate by increasing the number of samples and by including new determinants variables of NPLs. And also using other advanced techniques. The study then suggests that bank loan officers should constantly monitor each borrower’s circumstances to detect loan problems before they become uncorrectable.