Causes of Nonperforming Loans & It’s Provision in the Case of Development Bank of Ethiopia- Dessie Branch

Abstract

Development Bank of Ethiopia is one of the financial institutions that provide a loan for small and large projects on the basis of customer focused lending to viable projects in line with government priority areas. to put into operation the government's five-year draft Growth and Transformation Plan (GTP) the development bank of Ethiopia to reduce the nonperforming loan, its vial needs on recognizing causes for nonperforming loan and their provision system according to the policy on the regional level. The sample size was 60 from both performing and nonperforming clients’ bank and 14 employees. The sample sizes of the clients were determined by formula that provided by Glenn D. Israel (2009, April) in his equation five to determine the required sample size at 95% confidence level, degree of variability 5%: level of precision 9%. Questionnaire and Unstructured interview were the instruments used to collect primary data. The results of the study revealed that the demographic characteristics of the clients and employees are significantly effects on the repayment of loans. At the time of approval loan to the project and extending the existing project the bank facing some challenges, For instance on does not fulfill the requirement documents on time. And the continuous rising price, the approved loan may be unable to complete on time to finance the projects. On the disbursing the loan to the projects and currently market conditions are different, due to the economy fluctuations in the country to finance the project. Therefore, this situation can be pains to start well the project, to manage the project and to repay the loan as well. The projects that are more faces to repay the loan are in service and Hotel investment project. Some of the reasons are due to high computation in the market, problems on managing the business, low level of recording the book keeping as well as improper preparation of financial statement. The causes of the nonperforming loan by the client and employee side also from client the loan diverting to the other business, marketing problems for their products, inflation condition, lack experts on the business, due to shortage supplies to their business and asymmetric information between the bank and employee.

Keywords: Follow up system, Causes of nonperforming loans, and Provision.