Determinants Of Non-Performing Loans In Selected Private Commercial Banks In Ethiopia

Abstract

The main goal of Ethiopian private commercial banks (EPCB) is to operate profitably in order to maintain this stability and improve growth and sustainability. However, EPCBs experience high levels of non-performing loans. This trend threatens the viability and sustainability of the banks and hinders the achievement of their goals. This study was aimed at examining the determinants of non-performing loan. Specifically, the study sought to establish the effect of microeconomic variables (deposit interest rate, exchange rate and annual inflation rate), bank specific (loan to deposit ratio, and loan growth rate) and borrower specific characteristics characteristic (business profit margin). The study used both primary and secondary data. The study target population comprises six private commercial banks currently operating in Ethiopia. The study adopts a mixed methods research approach by combining documentary analysis (structured review of documents) and in-depth interviews. More specifically, the study reviews the financial records of six private commercial banks in Ethiopia and relevant data on macroeconomic factors considered for the period from the year 2004 to 2018. The sampling of the study includes six private commercial banks, from 16 private commercial banks based on their share of total outstanding loan. The collected panel data is analyzed using descriptive statics, correlation analysis and multiple linear regressions analysis. The findings of the study show that business profit margin, deposit interest rate, loan growth rate, and loan to deposit ratio were statistically significant factors in influencing private banks’ NPLs. On the other hand, variables like exchange rate and inflation rate were found to be statistically insignificant. Based on the findings the study recommended that Loan growth, business profit margin, loan to deposit ratio and deposit interest rate were significant driver of NPLs, hence focusing and engendering the institution alongside these indicators could reduce the probability of NPL in Ethiopian private commercial banks.