Abstract:
The term Non-performing Loans is used to describe Loans whose credit quality has deteriorated
such that full collection of principal and/or interest in accordance with prescribed repayment
terms of the Loan or advance is in question. The main objective of this study is to investigate
empirical determinants of Nonperforming Loans of commercial Banks in Ethiopia. Purposive
sampling technique were used(from the total commercial banks operating in the country, a sample
of ten Banks having at least ten years of financial statement and with the highest percentage
share in Loans and advance disbursement were selected and studied for the period 2010 through
2019. In order to achieve the stated objective, explanatory research design and quantitative
research approach were used. The study used Nonperforming Loan to gross Loan as a dependent
variable and capital adequacy ratio, financial performance, loan to deposit ratio, real exchange
rate, income diversification and inflation. The results of the random effect regression exhibit that
all bank specific variables except financial performance that are used in this study found to have
a significant effect on NPLs of ECBs. Among macroeconomic variables, the only macroeconomic
variable found to have a significant effect for the period under consideration was effective
exchange rate. Based on these findings, bank management is recommended to give more focus to
bank specific factors as compared to macroeconomic ones in their decision making. With respect
to exchange rate, the government of Ethiopia should have to launch stable policy to decrease the
possibility of loan defaults in commercial banks of Ethiopia.
