Drivers of Non-Performing Loans in Ethiopian Commercial Banks: An Empirical Investigation

This paper examines the bank-specific and macro-economic determinants of non-performing loans (NPLs) in Ethiopian commercial banks from 2008 to 2022. The study uses an explanatory research design to identify cause-and-effect relationships between NPLs and their determinants. Feasible generalized least squares panel regression was applied to data from nine commercial banks (one public and eight private). The analysis revealed that return on assets had a negative and significant impact on NPLs. Conversely, the loan-to-deposit ratio had a positive and significant impact, while the efficiency ratio had a negative but statistically insignificant effect. Among macroeconomic factors, GDP, the effective tax rate, and lending interest rates had a positive and significant impact on NPLs, while government expenditure and broad money supply had negative and significant effects. Inflation rate had a positive but insignificant effect. The study suggests that bank loan officers should monitor borrowers' circumstances to prevent loan defaults, while the National Bank of Ethiopia should adopt expansionary monetary policy, and the government should implement expansionary fiscal policies to reduce NPLs levels.