DETERMINANTS OF NON-PERFORMING LOANS IN COMMERCIAL BANK OF ETHIOPIA.

Abstract

Through providing financial and technical support to workable projects in conformity with government policy, CBE has remained committed to assisting the nation's development endeavours as it has for more than a century. However, availing loan to borrower is not an easy task, this is because of the high financial risk of the bank as a result of failure to collect the disburse loan from the customers. It is against this background that this research attempt to examine the factors that affect nonperforming loan at CBE. A well-structured self- administered questionnaire was used as the main tool for data collection and was administered to 120 respondents, out of which 113(94%) were retrieved and appropriately filled. Reliability of the research instrument was calculated and found to be 0.986 which means all items are reliable and data has internal consistency and hence acceptable for further analysis. The data were analyzed using both descriptive and inferential statistical approach. The findings of the study revealed that capital adequacy, bank efficiency, income diversification and inflation jointly and individually affect the non-performing loan ratio of the bank. The regression analysis the result also indicated that 57.54% of the variation in the dependent variable was explained by independent variables. Among the explanatory variables that affects non-performing loan of the income diversification variable found to be the most dominant factors that effects nonperforming loan and followed by capital adequacy. The study recommended that banks should put in place a vibrant credit process that ensures proper customer selection, robust credit analysis, proactive monitoring and clear recovery strategies for sick loans; formulate a clear policy framework that addresses issues of conflict of interest, ethical standard and check and balance in credit process; organizational capacity enhancement of banks; deliberate effort to develop culture