DETERMINANTS OF NON-PERFORMING LOANS IN ETHIOPIAN COMMERCIAL BANKS

Abstract

This study investigates the macroeconomic and bank-specific factors influencing non-performing loans within Ethiopian commercial banks. Employing a quantitative research approach, it selected a purposive sample of 13 commercial banks from a total of 33. Secondary data, covering the years 2014 to 2023, were gathered from audited bank financial statements, the National Bank of Ethiopia (NBE), the Central Statistical Agency (CSA), and the Ministry of Finance. To ensure data robustness, tests for heteroskedasticity, normality, serial correlation, and multicollinearity were conducted, with no violations found. Data analysis was performed using a multiple regression model and the Fixed Effect Model (FEM) for panel data regression via EViews software version 12. The study’s findings indicate that Gross Domestic Product (GDP), Capital Adequacy Ratio (CAR), and Return on Equity (ROE) have a significant negative impact on NPL levels, while money supply, inflation rate, and loan growth rate positively and significantly influence NPL prevalence. Additionally, the Loan-to-Deposit Ratio (LDR) was found to have a positive but insignificant effect on NPLs. The study recommends that to reduce nonperforming loans (NPLs) in Ethiopia, efforts should focus on promoting economic growth, reducing unemployment through skill development and entrepreneurship, and maintaining stable inflation via effective monetary policies. Banks are encouraged to strengthen capital adequacy, improve credit assessment practices, enhance management efficiency, conduct regular risk assessments, and invest in financial literacy to promote responsible borrowing and reduce credit risk.