Determinants Of Non Performing Loan: The Case Of Commercial Banks In Ethiopia

Abstract

Non-performing loans (NPL) are a critical issue for the banking sector in Ethiopia. NPLs can have a significant negative impact on a bank's profitability, stability, and overall financial health. As such, understanding the determinants of NPL in Ethiopian commercial banks is essential for effective risk management and regulatory oversight. Ethiopia has a rapidly growing economy, with a banking sector that has seen significant expansion in recent years. However, this growth has also brought challenges, including an increase in NPLs. Identifying the key factors that contribute to NPLs in Ethiopian commercial banks is crucial for developing strategies to mitigate these risks and ensure the long-term sustainability of the sector. This study aims to contribute to the existing literature on NPLs by examining the key determinants of NPL in Ethiopian commercial banks. To achieve this objective, ten banks with ten years of data ranging from 2013-2022 were selected for analysis. A positivism knowledge claim was adopted, along with a quantitative research approach and an explanatory research design. The results of the OLS regression analysis revealed that five variables, namely loan growth rate (LGR), bank size (BS), return on assets (ROA), interest rate (IR), and inflation rate (INF), have a statistically significant effect on NPL in Ethiopian commercial banks. This implies that factors such as loan portfolio quality, bank size, profitability, and macroeconomic conditions play a crucial role in determining the level of NPLs in the banking sector. On the other hand, variables such as return on equity (ROE), capital adequacy (CA), and gross domestic product (GDP) were found to have a statistically insignificant effect on NPL. These findings provide valuable insights for policymakers, regulators, and bank management in Ethiopia to develop effective strategies for managing NPLs and promoting a sound and stable banking sector