Unraveling the Driver of Non-Performing Loans: Insights from Ethiopian commercial Banks
Keywords:
Non-performing loanAbstract
This study investigates the key Unraveling the Driver of Non-Performing Loans: Insights from Ethiopian Banks. Utilizing panel data from 10 commercial banks spanning 2013 to 2023, sourced from the National Bank of Ethiopia and banks' annual reports, the study employs random effects panel least squares regression. Bank-specific determinants include Return on Assets, Return on Equity; Capital Adequacy Ratio, Loan Growth Rate, and Loan-to-Deposit Ratio, Macroeconomic factors examined are GDP Growth Rate, Inflation Rate, Exchange Rate, and Unemployment Rate. The analysis reveals that Return on Assets, Return on Equity, and Unemployment Rate significantly and positively influence Non-Performing Loans, suggesting that lower profitability and economic distress are associated with increased non-performing loans. Conversely, Capital Adequacy Ratio, Loan Growth Rate, GDP Growth Rate, and Exchange Rate demonstrate a significant negative impact on NPLs, implying that stronger capital buffers, faster loan expansion, economic growth, and a depreciating exchange rate contribute to lower NPLs. Increase in Capital adequacy could increase NPLs since poorly capitalized banks lend recklessly to recover lost returns. These findings underscore the importance for Ethiopian commercial banks to meticulously consider both bank-specific and macroeconomic factors in their credit risk management frameworks to mitigate NPL accumulation and enhance financial stability.
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