Abstract:
The main objective of the study was to investigate the effect of macroeconomic
variables on nonperforming loans in Ethiopian commercial banks. This research
intends to fill a gap by increasing the number of macroeconomic variables and number of
years under study to gain an in depth knowledge of the effect of macroeconomic variables
on NPL. The study used panel data model in examining the model and collected
the secondary data from selected 7 commercial banks in Ethiopia covering the 20
and above years period 2001 to 2022. Model selection was done by Hausman
specification test to determine the most suitable model to be used in this study and the
result showed that random effect model become appropriate. The major findings are that
there is positive and significant relationship between non-performing loans and lending
rate. There is negative and significant relationship between non-performing loans and
terms of trade, deposit rate, real GDP growth rate and broad money supply. The study
suggests that, NBE and commercial banks should consider the macroeconomic variables
before extending loans and the government could also play important role in improving
the level of NPLs in the economy by influencing the macroeconomic variables. As a
suggestion, researchers ought to involve additional commercial banks in their studies.
Additionally, future research could explore other macroeconomic indicators such as
gross fixed capital formation, investment growth, consumption patterns, and the loan-to_GDP ratio.
