Factors affecting the performance of non-performing loans (NPL); case study of selected ten districts in Addis Ababa and Head office of Commercial Bank of Ethiopia

Abstract

The growth and sustainability of financial institutions is dependent on how they manage non-performing loans, otherwise, it negatively affects their profitability, liquidity and asset quality, and hence performance will decline through time. In line with this, the current study has examined factors affecting non-performing loans in the case of selected ten districts in Addis Ababa and Head Office of Commercial Bank of Ethiopia. The study adopted a cross-sectional descriptive survey design by applying both quantitative and qualitative approaches. The primary data were collected from 154 employees through questionnaire and 10 credit managers via interview by applying both stratified (to include a respondent from kindly each loan department unit) and lottery (to select a respondent from the first strata) sampling methods. The findings on the descriptive analysis depict that factors significant effect/influence on the performance of NPL in the bank industry. Likewise, the study found that some factors have vital influence on the performance of NPL; whereas, others like Bank size and performance (BSP), Credit Appraisal (CA) and Credit monitoring (CM) have moderate effect the performance of NPL. Moreover, the study found that all the factors except Credit Monitoring (CM) have significant effect on the performance of NPL in the bank. Finally, the study recommended that the problems on NPL status can be resolved by securing additional collateral, sellout/buyout of loan to/from other banks, changing the form of loan partially or fully, enforcing additional conditions/covenants, replacement/improvement of the management, reduction of overdraft to a lower limit and approve additional finance if there are appropriate and concrete justifiable reasons.