Determinants of non performing loans of commercial banks: evidence from ethiopia

Abstract

This study examined the determinants of non-performing loans of commercial banks evidence from Ethiopia. The study adopted an explanatory research design and quantitative research approach with secondary panel data utilized over the study period 2010-2019. The study used data collected from the National Bank of Ethiopia, the Central Statistical Agency, and the financial statement of thirteen commercial banks. More specifically, descriptive and random effect multiple regression analysis are employed to analyze the balanced panel data. Findings of the study revealed that return on asset, return on equity, loan to deposit ratio and bank size have a negative and significant impact on NPLs. Whereas, capital adequacy ratio, effective tax rate, and gross domestic product have a positive and significant effect on NPLs. On the other hand, the Inflation rate has a positive and insignificant effect on NPLs of commercial banks of Ethiopia. Furthermore, the study recommended as banks management should focus on strategies that increase non-interest income which in turn increase ROA and ROE. Besides, to reduce or minimize the level of NPLs in the Ethiopian banking industry, the government should implement policies that will create an enabling environment to improve the country’s real GDP