Determinants of Non-Performing Loans : Evidence from Selected Commercial Banks in Ethiopia

Abstract

The main purpose  of  this study  was  to examine Determinant of nonperforming loans  on selected government and private commercial banks in Ethiopia using a balanced panel data of twelve commercial banks  selected purposively from year (2011G.C-2020G.C).The study used explanatory research following a quantitative approach and secondary data of audited annual financial report of respective banks  from National Bank of Ethiopia, The data’s were analyzed by using multiple linear regression model using STATA 16.1 software package for this empirical study. The finding of the research revealed that Loan to deposit ratio (LTD) ratio had positive effect  as Inflation had a negative, but insignificant effect on NPLs of commercial banks in Ethiopia. However, bank profitability measured in terms of Return on equity (ROE), banks capital adequacy ratio and lending rate had negative and statistically significant effect whereas bank profitability measured in terms of Return on Asset (ROA) and effective tax rate had positive and statistically significant effect on non-performing loans of commercial banks in Ethiopia.  Furthermore, the study recommended as bank managers should emphasize the management of current assets and loans than fixed assets in order 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 and also to make decision on timely fashion to meet their need.

Keywords: Nonperforming loans, bank specific factors, macroeconomic factors

DOI: 10.7176/RJFA/14-2-02

Publication date: January 31^st 2023