DETERMINATES OF NON-PERFORMING LOANS: EMPIRICAL STUDY ON COMMERCIAL BANKS IN ETHIOPIA

ABSTRACT The purpose of this study was to investigate both bank specific and macro-economic determinants of Nonperforming Loans of commercial banks in Ethiopia. This study aimed to test and confirm the effectiveness of commercials banks non-performing loan determinants and how it affects the level of nonperforming loan in Ethiopia commercial banks during the past ten consecutive years (2013-2022). This research is used descriptive and explanatory research design that identifies the trend and cause and effect relationships between the NPLs and its determinants. Random effect panel regression was used for the data of nine commercial banks (one public owned and eight private owned banks). The study period covered from 2013 to 2022. Seven factors (three bank specific and four macroeconomic factors) affecting banks nonperforming loan was selected and analyzed. The results of balanced random effect panel data regression analysis showed that return on asset and bank size had positive relationship and insignificant and significant impact on banks nonperforming loan respectively. On other hand from bank specific factors return on equity had negative and significant impact on non-performing loan. According to the regression result return on equity is a very important determinant of nonperforming loan in Ethiopia banking industry. Lending interest rate, Gross domestic product and inflation rate is negative and has in insignificant impact on banks nonperforming loan and unemployment rate had positive and statistically significant impact on banks nonperforming loan. The study suggests that banks loan officers should constantly control each borrower’s circumstances to detect loan problems before they become uncorrectable.