Abstract:
As noted by Sharon (2007), loans have a vital contribution towards development of economy.
However, its nonpayment also leads to incidence of huge loss on banks in particular and country
in general. Hence, this study was conducted to examine both bank specific (loan to deposit ratio,
capital adequacy ratio, return on asset and return on equity) and macroeconomic (lending rate,
inflation and effective tax rate) determinants of NPLs of commercial banks in Ethiopia. To this
end, the researcher has selected eight senior commercial banks in Ethiopia judgmentally. This
study used secondary sources of data, which is panel data in nature, over the period 2002-2013
These data were collected from NBE and CSA. Furthermore, fixed effect model was used to
examine the determinants of NPLs. This research is an explanatory research design that
identifies the cause and effect relationships between the NPLs and its determinants.
The study shows a down ward sloping of nonperforming loans for commercial banks in Ethiopia.
The finding also revealed as LTD ratio had positive whereas INFR had negative, but
insignificant effect on NPLs of commercial banks in Ethiopia. However, bank profitability
measured in terms of ROE, banks capital adequacy ratio and lending rate had negative and
statistically significant effect whereas bank profitability measured in terms of ROA and effective
tax rate had positive and statistically significant effect on NPLs of commercial banks in Ethiopia.
The finding of this study is significant since once identifying the determinants of NPLs might
enable management body to make appropriate lending policies that prevent the occurrence of
NPLs. 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.
