The Effect of Determinants of Non-performing Assets on Financial Performance: Evidence from Public Commercial Banks of Ethiopia

Abstract

This study focuses on the determinants of Non-performing Assets and its impact on financial performance of the Development Bank of Ethiopia and the Commercial Bank of Ethiopia. Bank loans have a vital contribution towards the development of economy by financing different sectors. However, non-performing loans lead to incidence of huge loss on banks’ profit, in particular, and country economy, in general. Hence, this study was conducted to examine banks internal factors (asset quality, solvency risk and net income growth rate) and macroeconomic factors (inflation rate, lending interest rate and GDP rate). To this end, the researcher has selected the Development Bank of Ethiopia and the Commercial Bank of Ethiopia judgmentally. This study used secondary sources of data, which covered the period from 2010 to 2019. Furthermore, linear regression model has been used to examine the impact of non-performing loan by using STATA-13 software. This research adopts quantitative research design, explanatory, that identifies the cause and effect relationships between the study variables with returns of asset. The finding of this study is significant since once identifying the determinants of non-performing loan and its impact on financial performance might enable the management body to make appropriate lending policies that prevent the occurrence of non-performing loans. The study recommends that the bank should emphasize the management of loans to reduce the level of non-performing loans.