Abstract:
Non Performing Loans is the most important issue for banks to survive. Since long the argument
has been that macroeconomic factors affect the nonperforming loans and the existing literature
on macroeconomic variables suggests that many macroeconomic variables do strongly influence
them. Over the last few years the literature that examines NPLs has expanded in line with the
interest afforded to understanding the factors responsible for financial vulnerability. The study
aimed to investigate the explanatory power of macroeconomic variables as determinants of
NPLs. This study used time series data of NPLs and eight macroeconomic variables over the
period of 1982-2017 and multivariate time serious model of vector auto regressive and vector
error correction model of Johansen approach was used to test the explanatory power of
macroeconomic variables as determinants of NPLs.
Key words: NPLs, Macroeconomic variables, Determinants, Development Bank of Ethiopia,
Co-integration, Vector Autoregressive, Error Correction Mechanism.
