Determinants of Ethiopian Private Commercial Banks' Asset Quality

Abstract

Both macroeconomic and bank-specific factors affect the occurrence of Non-Performing Loan; the most suitable proxy for asset quality measurement. This study identifies bank specific and macroeconomic factors that contribute to these nonperforming loans in Ethiopian private commercial banks. Six private commercial banks have been the subject for the study ranging from 2004/2005 to 2012/2013. The bank's financial statement, National Bank of Ethiopia and Ministry of finance and Economic Cooperation has been the main source for the study and the panel analysis has been carried out to obtain the result for this empirical study. The study begins with Hausman test (Random Effect Model versus Fixed Effect Model) to determine the most suitable model to be used in this study. The empirical results showed that GDP growth and annual inflation rate are positively related to non-performing loans, suggesting that private commercial banks should consider the macro economic factors before extending loans. A negative relationship of CAR and ROE with the volume of private commercial banks non- performing loans was also found. Contrary to previous studies, the findings also showed an insignificant relationship among real lending rate and NPLs of Ethiopian private commercial banks. Keywords: Non-performing loans; Macroeconomic determinants; Bank specific determinants