DETERMINANT OF NON-PERFORMING LOAN IN DEVELOPMENT BANK OF ETHIOPIA

Abstract

This study aimed at examining the determinant of non-performing loans in the development bank of Ethiopia. Other objectives included determining bank-specific and macroeconomic factors for default loan performance. Based on Development Bank of Ethiopia (DBE) reports from 1990-2019 there was an increase in NPLs during the studied period. Due to this, the performance of the bank is highly affected and the bank leads to insolvency. The thesis aimed to determine determinants of non-performing loans in DBE by determining theoretical and empirical evidence that help answer the research objective. The study used an explanatory design and a mixed research approach. The primary data by interviewing the staff of DBE those who were senior credit officers and team managers. And the secondary data was obtained from the bank’s annual financial performance report and the National Bank’s annual report for thirty consecutive fiscal periods from 1990 up to 2019. This study used an autoregressive distributed lag (ARDL) model or Bound Testing approach to co-integration. Non-performing loan ratio was taken as the dependent variable while Return on asset (earning capacity), liquidity, capital adequacy, bank size, exchange rate, lending rate (interest rate), inflation, and GDP have been taken as independent variables. The study found that there was a significant negative relationship between earning ability (ROA), Interest rate, Gross domestic products, inflation rate, and nonperforming loans of development banks of Ethiopia. The relationship between bank size and liquidity with non-performing loans was found to be positive. In addition to bank-specific factors and macroeconomic variables related to variables such Bank lends by the project itself as collateral with small lending rate relatively other commercial banks of the country, a long delay on implantation, poor known your customer assessment, political and social instability, inadequate coordination among stakeholder, governance, and structure, excessive external intervention The implications of the study suggest that Development Bank of Ethiopia should modified business model, bank credit policy-related issue such as appropriateness, timelines risk management and alignment with the current political macroeconomic realities, the bank should regulating interference of government bodies on loan approval, processes, and implementation, the bank should reduce project delays.