Final Full Thesis Text

Research Report of Dagne K.
St. Mary’s University

School of Graduate Studies
(MBA Program)
A RESEARCH PROJECT ON ASSESSMENT OF NPLS

AND EVALUATION OF THEIR CAUSES
IN ETHIOPIAN PRIVATE BANKS
WITH SPECIFIC REFERENCE TO BOA
by: Dagne Kitaba

(ID.No. SGS/0044/2009B)
June, 2019
Addis Abeba
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Statement of Declaration
I, the under signed Dagne Kitaba, hereby declare that the project work entitled “The assessment
of Non-performing Loans (NPLs) and Evaluation of their causes in Ethiopian Private Banks with
specific reference to Bank of Abyssinia (BOA)” is submitted by me in partial fulfillment of the
requirement of the degree of Masters of Business Administration at St, Mary‟s University,
School of Graduate studies. It is my original work and has not been presented for the award of
any other Degree, Diploma, Fellowship or other similar titles of this or any other University or
institution.
Place: Addis Abeba Signature: ----------------
Date: June, 2019 Name: Dagne Kitaba
ID. No. SGS/0044/2009 B
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Statement of Certification
This is to certify that this Project work entitled “The assessment of Non-performing Loans
(NPLs) and Evaluation of their causes in Ethiopian Private Banks with specific reference to Bank
of Abyssinia (BOA)” is carried out by Dagne Kitaba. Certified further, that the work is original
and is suitable for submission for the reward of the MBA degree in General Management.
Place: Addis Abeba Signature: ---------------------------------

Date: June, 2019 Advisor: Asmamaw Getie
Asst. Professor
School of Graduate Studies
St. Mary‟s University
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A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY SCHOOL OF

GRADUATE STUDIES
IN PARTIAL FULFILLEMENT OF THE REQUIREMENT FOR THE
DEGREE OF MASTERS OF BUSINESS ADMINISTRATION
APPROVED BY BOARD OF EXAMINERS

________________ _____ _____________________
Dean, Graduate Studies Signature & Date
_______________________ _____________________
Advisor Signature & Date
________________________ _____________________
External Examiner Signature & Date
_____________________ ______________________
Internal Examiner Signature & Date
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Acknowledgement
First and for most I greatly thank my benevolent Lord, for his unparalleled support in shaping
my personal life and academic journey. I would like to express my gratitude to my main advisor
Asmamaw Getie (Asst. professor) for his invaluable comments, and guidance in accomplishing
this thesis and make it successful. Besides, I extend my appreciation to the staff and management
members of Bank of Abyssinia, National Bank of Ethiopia, and other senior private Banks
Central Statistical Agency for their cooperation in providing necessary data.
Furthermore, my indebted gratitude expressed to my schoolmates and all members of my family
for their encouragement in completing this research paper.
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Abstract
While financial institutions used to face difficulties for a multitude of reasons, the major cause of
serious banking problems continues to be directly related to the occurrence and rise of NPLs as
a result of many macro and micro factors. Hence, this study was conducted to assess the status
of Non-performing Loans (NPLs) and evaluate their causes especially the seven bank specific
causes (poor credit risk assessment, poor credit monitoring, collateral, Granting loan to highly
levered borrowers, Loan divert ion, Borrowers orientation, Credit size ) that were considered to
contribute to NPLs in Ethiopian Private Banks with specific reference to BOA. To this effect, the
researcher has selected 12 senior private commercial banks in Ethiopia to fetch for relevant data
for the last ten years as secondary sources of data. However, due to the secrecy of some data
keeping principle of the banks no sufficient data especially on NPLs records could be found.
These data were collected from NBE and the respective banks archive records. The collected
data was subject to descriptive analysis to answer the research questions. The analysis was
made using the SPSS software package. These included frequencies, descriptive statistics of
means and standard deviations. As far as the secondary data sources were concerned the NPLs
trend is showing a down ward sloping. With respect to the primary source of data, however, the
contribution of most of the independent variables to the status and occurrence of NPLs is quite
significant. The finding revealed that all the causes have a direct relationship with the rise in
NPLs. While tested with each other, the correlation of the independent variables discovered the
existence of both negative and positive relationships. Among the seven independent variables the
two variables that the researcher focused on more, namely; Loan divert ion and providing loan
to Highly levered borrowers were finally concluded to have been the major contributing factors
for the occurrence and rise of NPLs in Ethiopian Private banks with specific reference to BOA.
Finally, Private Banks were also recommended to focus on all aspects of impacts of the above
mentioned independent variables in order to mitigate solution they may pose on the occurrence
of NPLs. Future researchers who may have an interest to conduct a research on similar topic
can use this research paper as an input by applying an increased size of the samples through
wider perspectives of research methods in order to come up with a more reliable and
comprehensive research outcome.
Key words: Non-performing Loans, bank specific causes (factors), macroeconomic factors
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Table of Contents
Title page…………………………………………………………………………………………… i
Declaration…………………………………………………………………………………………. i
Certification ……………………………………………………………………………………… ii
Abstract .......................................................................................................................................... iii
Acknowledgement ........................................................................................................................... .iv
Table of Contents............................................................................................................................. vi
List of Figures .................................................................................................................................. viii
List of Tables ................................................................................................................................... viii
Acronym ........................................................................................................................................... .ix
CHAPTER ONE .............................................................................................................................. 1

1. Introduction………...................................................................................................................... 1
1.1 Background of the Study ............................................................................................................ 1
1.2Statement of the Problem ........................................................................................................ 4
1.3Objective of the Stud.............................................................................................................. 6
1.4Research Question .................................................................................................................. 6
1.5Scope of the Study ................................................................................................................... 7
1.6Significance of the study ........................................................................................................... 8
1.7Limitation of the study……………………………………………………………………….. 8
1.8Organization of the paper ........................................................................................................... .8
CHAPTER TWO ............................................................................................................................ 10

2. REVIEW of RELATED LITERATURE ...................................................................................... 10
2.1 History of Banking in Ethiopia……………………………............................................................ 10
2.2 Conceptural framework ………………………………………………………………………………………………. 10
2.3 Financial (Loan) Asset….................................................................................................... 11
2.4 Banks……….. ................................................................................................................ 11
2.5.Loans and Performing Loans….......................................................................................... 12
2.6 Loan Factors………….. ....................................................................................................... 15
2.7 Non performing Loans provision................................................................................................ 15
2.8. The level of success of NPL mitigation action …………………………………………………………………… 16.
2.9. Empirical Evidences...................... ……………………………………………………………………………………… 17.
CHAPTER THREE ......................................................................................................................... 24

3. RESEARCH METHODOLOGY .................................................................................................. 24
3.1 Introduction…………... .................................................................................................. 24
3.2 Research design................................................................................................................ 24
3.3 Target population ………………………………………………………………………… 25
3.4. Sampling Techniques........................................................................................................ 26
3.5 Data collection Technique........................................................................................................... 26
3.6 Data Analysis Presentation………………………………………………………………………………………………… 27
3.5 Dependent variable ............................................................................................................... 27
3.6 Independent Variables ........................................................................................................... 27
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3.7 Model Specification .................................................................................................................... 27
CHAPTER FOUR .......................................................................................................................... 30

FINDING and DISCUSSIONS ....................................................................................................... 30
4.1 Introduction…………………………………………………………………………………… 30
4.2.Data collected from Private Banks (Secondary source)………………………………………. .31
4.3 Respondents View on Bank specific factors attributed to NPLs of Ethn. Pvt. Banks................. .31
4.4.Respondents View collected thru Interview on different issues related to NPLs of BOA32.
4.5 The Summary of General profiles of the respondents…......................................................... ……32
4.6 Summary of the Chapter…………………………………………………………………………………………………………….51
CHAPTER FIVE ................................................................................................................................52

5. Conclusion and Recommendations…………… .............................................................................52
5.1 Conclusion.....................................................................................................................................52
5.2 Recommendations .........................................................................................................................52
BIBLOGRAGHY............................................................................................................................. ..54
APPENDICES .................................................................................................................................. . 57
Appendix1: Questionnnare............................................................................................................... .. 57
Appendix 2: Interview question…………………………………………………………………… .. 60
Appendix 3: Data of surveyed Private Banks………………………………………………………...61
Appendix 4; NPLs and NPLs Ration of 12 private Banks…………………………………………....69
List of Figures
Fig I 3.9 Model Specification………………………………………………………….. 21
FogII 4.4.3 Rank factors of NPLs …………………………………………………….…....27
List of Tables
Table No. Description Page
Table 4.2.1 Three years of NPLs records of Pvt Banks… …………………………23
Table 4.5.1 Summary of General profile……………………....................................24
Table 4.5.2 Determinants of Factors of NPLs………………………………………25
Table 4.5.3 Rank factors of NPLs…………………………..……………………….27
Table 4.5.4. Poor Credit Risk Assessment (PCRA) …..……….…………………….27
Table 4.5.4.1 Descriptive Statistics of PCRA…………………………………………28
Table 4.5.5 Poor Credit Monitoring (PRM)..………………………………………..29
Table 4.5.5.1 Descriptive Statistics of PRM…………………………………………..30
Table 4.5.6 Collateral…………………………………................ …………………..31
Table 4.5.6.1 Descriptive Statistics of Collateral………………….…………………..32
Table 4.5.7 Highly Levered…………………………………………………………..33
Table 4.5.7.1 Descriptive Statistics of Highly Levered……………………………….34
Table 4.5.8 Loan Diver tion……………………………….………………………….34
Table 4.5.9 Borrowers Orientation…………………………………………………...35
Table 4.5.9.1 Descriptive Statistics of ………………………………………………...36
Table 4.5.10 Credit Size……………………………………………………………….37
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Table 4.5.11 Correlation………………………………… ………………………........38

Table 4.5.12 Summary of the importance and Rank of the factors……………………39
Table 4.6. Summary of the Chapter…………………………………………………40
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Acronyms
ACH=Automated Clearing House
AIB=Awash Bank
ATM=Automated Tellers Machine
BB=Birhan Bank
BIB=Bunna International Bank
BOA=Bank of Abyssinia
CBB=Construction and Business Bank
CBE= Commercial Bank of Ethiopia
CBK=Central Bank of Kenya
CBO=Cooperative Bank of Oromia
DB=Dashen Bank
FSI=Financial Soundness Indicator
GDP=Gross Domestic Product
HO=Head Office
IMF=International Monetary Fund
NBE= National Bank of Ethiopia
NIB=Nib International Bank
NPL=Non-performing Loan
OIB=Oromia International Bank
PL=Performing Loan
RM=Relation Manager
SNA=Statistical National Account
UK=United Kingdom
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CHAPTER ONE
1. Introduction
1.1. Background of the study
In the modern world, Financial Institutions (FIs) are very important to support sustainable
development of any economy as they facilitate the intermediary role of mobilization of finance,
which will be supported with the control and risk aspect of probable uncertainties of business
operations and the most essential and highly susceptible economic elements. Among the major
financial Institutions, commercial banks do play the most crucial role in facilitating the
intermediary role through the mobilization of funds(savings) in different forms of deposits from
different sources; including the general community, business firms, government organizations,
non government organizations and associations, which in return will be allocated for different
investment segments. Financial Institutions (FIs) are very important in any economy as they
mobilize savings for productive investments and facilitating capital flows to various sectors in
the economy, thus, stimulating investments and increase productivity (DFID, 2004)and Beck,
2001, There is strong empirical evidence that robust financial sector support economic growth
(Rajaraman and Visishtha, 2002). They play even a most critical role to emergent economies
where most borrowers have no access to capital markets (Greuning and Bratanovic, 2003).
On the other hand, however borrowers may fail to repay the borrowed fund in accordance with
the contractual agreement signed with the lender (the bank or other financial institution). Here is
the point where deterioration of loan asset emerges. Non-performing loan (NPL) is a worldwide
issue that adversely affects financial market stability in general and smooth operation of banking
industry in particular.
In a more comprehensive term, Non Performing Loan (NPL) is a credit facilit y in respect
of which the interest and or principal amount has remained past due for a specific period of
time. Non-performing Loans represent bad loans, the borrowers of which failed to satisfy
their repayment obligations.
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In many countries the high level of non-performing loans in the banking industry has been a
hindrance to economic stability. When these loans and advances become non-performing,
banks liquidity and relative earnings are adversely affected. Moreover NPLs create
problems for the banking sector's balance sheet on the asset side. They also create a negative
impact on the income statement as a result of provisioning for loan losses. In the worst scenario,
a high level of NPLs in a banking system poses a systemic risk, inviting a panic run of depositors
and sharply limiting financial intermediation, and subsequently investment and growth.
The most important reasons for Non-performing Loans are insufficient appraisal of loan
proposals and also inadequate monitoring of the loans given out. Aggressive lending by banks to
big corporate houses is also to be critically investigated. The adverse effect of NPLs is
attributable to bank managers‟ adverse selection of borrowers (Brownbridge, 1998). NPLs are
determined by different factors such as level of GDP, inflation , unemployment, volume of
deposit, return on equity, return on asset, capital adequacy, total loan, liquidity, bank size,
excessive lending, interest rate and credit growth. There are also various macroeconomic and
bank specific factors that impact asset quality of banks. Low economic growth, less exports due
to a weak global economy, diversion of the loan to other purpose other than the one originally
agreed upon, delay in granting administrative clearance to infrastructure and industrial projects
are a few macroeconomic factors that lead to the occurrence and rise in Non-performing Loans.
A sharp fall in currency exchange rates also causes importers to default on loans, (Ahmad and
Bashir,2013). These factors are studied by different researchers in different countries
(Mileris,2012, Tomak,2013, Ahmad and Bashir,2013, Shingjerji,2013 and etc.). In most NPLs
victim countries, most of the above factors have contributed to their loan asset quality
deterioration.
Credit evaluation and lending decisions made in the past by lending institutions put a lot of
emphasis on security than other similar important considerations (Santomero, 1997). There are
instances in the past when it was easier to get a loan from a financial institution as long as the
borrower had security to be charged rather than the ability to service the loan. Cash flow
projections, viability of the project, character of the borrower, previous loans completion and
ability to repay were not considered as important parameters. This way a number of lending
institutions ended up with many loan defaults due to incomplete, poor and unprofessional credit
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risk assessment and valuation particularly using all the 5C‟s of credit appraisal model that is:
capacity, credibility, capital, collateral and character. Effective loan portfolio management
begins with oversight of the risk in individual loans (Sundarajan 2007). Prudent risk selection is
vital to maintaining favorable loan quality. Therefore, the historical emphasis on controlling the
quality of individual loan approvals and managing the performance of loans continues to be
essential.
The distinguishing feature of the study is that it assists to assess the status of Non-performing
Loans and evaluate the major bank specific causes contributing to the occurrence
and rise in Non-performing Loans in private Commercial Banks in Ethiopia with
specific reference to Bank of Abyssinia .
Until 1980‟s the credit worthiness culture of the borrowers coupled with credit administration
were so conservative to accommodate default. However, a little bit before the year 1997/98, the
moment where Foreclosure law was promulgated, things have been changed and NPLs reached
its peak up to a little bit higher than 50% of the loan asset of Commercial Bank of Ethiopia
(CBE) and Construction and Business Bank (CBB). To arrest the problem, mitigating
mechanism employed by these banks was too costly. For example CBE employed huge cost
marshal of loan collection campaign by mobilizing hundreds of loan collection officers, applying
recovery strategy devised by National Bank of Ethiopia (NBE); such as work out and
rescheduling, full collection, foreclosure, proceedings of litigation and finally cleaning its
balance sheet by instituting write off (removal of NPLs balance from the bank‟s Balance sheet)
mechanism.
In its later time record, however, the net non-performing loans (NPLs) ratio in the banking
system was slowed down towards the normal minimum ratio of 5% and even less. The
intervention of Government organ- National Bank of Ethiopia (NBE), to non-performing loan
recovery strategies have contributed much in the non exasperation of its condition.
In spite of all such intervention and the prevailing efforts, however, things seem to be changing
slightly. As per the release of Capital, the official NEWS letter, on April 18, 2018 the ratio of
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NPLs has increased, reversing the previous trend, since the government devaluated the birr by 15
percent against major hard currencies.
Following the Directives that the National Bank of Ethiopia (NBE) has issued, mandating that
the NPLs be less than five percent of the outstanding loans of all banks, coupled with recent
devaluation of birr by 15%, a lot of changes have been exhibited. According to experts, it is now
more common for debtors not to make their payments on time and there have been more
defaults. This has occurred after the Central Bank issued a directive limiting banks‟ outstanding
loans yearly growth rate by 16.5 percent or less compared with the preceding year if the person
they are loaning the money to is not engaging in an export-related business. Furthermore, as per
the release of Capital, there is a challenge that some smaller banks, which rash to exploit their
opportunities have already maxed out on the number of loans they are allowed to disburse. This
situation will no doubt create a negative impression “If a debtor knows they are not going to be
able to get a new loan until next year they are less likely to use the money they earn to pay off
their loan,” that is occurring especially in private banks (Capital NEWS 2018). “Even though
there is a five percent limit on NPLs before this trend started in most banks one can only see
three percent of NPLs. It was explained that the current condition may affect the youngest banks.
Larger banks have more capital, allowing them to follow the National Bank‟s 16.5 percent credit
ceiling circular Ref.No. MFAD/306/2017 dated NOV.27, 2017. The private sector has claimed
that the new law hinders it from obtaining adequate loans while they are also facing a shortage of
hard currency.
1.2. Statement of the Problem

Naturally, Non-performing Loans (NPLs) are one of the most attention drawing issues of
economic disturbing agents (Boudriga, 2009). For deterioration in banks‟ performance, Non-
performing Loans is one of the major causes of financial fragility. Past experience shows that a
rapid build‐up of bad loans plays a crucial role in banking crises (Demirgüç‐Kunt and
Detragiache, 1998, and González‐Hermosillo, 1999).
In practice, the rise in NPLs is emanated from the activities of lending the major portion of the
deposited fund collected from individuals, organizations, different public sectors and
associations, on the basis of a reasonable spread rate of interest, with the aim to earn more profit
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that accounts the lion share of income of the banks, but when the loaned fund failed to be repaid
within the agreed upon terms and conditions then the issue of Non-performing Loans comes into
picture. Bank profitability decisions to lend or not to lend influences the economic development
of its community becomes critical. As the lending process affected not only the banking activity,
but also the development process could also be stuck (Masood 2009, and Bhasin 2016a). So
risks should be avoided as much as possible. As a matter of fact most bank failures may be
traced to faulty policies and lenders awkward implementation of sound policies in respect of
loans and advances (Hardy, 1998, and Dimitrious P. Louzis, 2012).
Regular monitoring of loan quality, possibly with an early warning system capable of alerting
regulatory authorities of potential bank stress, is thus essential to ensure a sound financial system
and prevent systemic crises. In line with Basel II accord asset quality is regularly monitored by
supervisory authorities- central banks to ensure their well being. Impaired assets or non -
performing loans signal which calls for rapid intervention to protect the public fund the banks
mobilized. In this regard the intervention role being played by National Bank of Ethiopia (NBE)
in devising a road map, setting standards and supervising implementation is so great.
As per the release of Capital, the official NEWS letter, on April 18, 2018 the ratio of NPLs has
increased, reversing the previous trend, since the government devaluated the birr by 15 percent
against major hard currencies. According to experts, it is now more common for debtors not to
make their payments on time and there have been more defaults. This has occurred after the
Central Bank issued a directive limiting banks‟ outstanding loans yearly growth rate by 16.5
percent or less compared with the preceding year if the person they are loaning the money to is
not engaging in an export-related business. Furthermore, in the financial industry, there is a
challenge that some smaller banks, which rash to exploit their opportunities have already maxed
out on the number of loans they are allowed to disburse. This situation will no doubt create a
negative impression “If a debtor knows they are not going to be able to get a new loan until next
year they are less likely to use the money they earn to pay off their loan,” experts explained, that
this is occurring in private banks.
Being said all that, the intention of this paper is to assess the status of Non-performing Loans and
evaluate their causes in Ethiopian private Banks with specific reference to BOA.
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In addition, it is also imperative to this study is that to focus on the effects of the two major bank
specific factors, namely; i) divert ion of the loan to other purpose other than the one originally
agreed upon, and ii) excessive lending, which the researcher of this study believed that they are
not well addressed in various studies conducted so far on the topic at hand.
1.3. Objectives of the Study
This study is carried out to fulfill the following objectives:
1.3.1. General objective
The main objective of this study is to assess the status of Non-performing Loans and evaluate
their bank specific causes in Ethiopian private banks.
1.3.2. Specific Objectives
1. To assess the status of NPLs of Ethiopian Private Commercial Banks.

2. To assess the status of NPLs of BOA.
3. To investigate the major bank specific causes contributing to Non-performing Loans of
Bank of Abyssinia (BOA) in their rank orders.
4. To identify the impact that the cause (independent variables); namely Diversion of the
loan to other purpose other than the one originally agreed upon, have on Non-performing
Loans of Bank of Abyssinia (BOA).
5. To identify the impact that the cause (independent variable); namely excessive lending,
have on Non-performing Loans of BOA.
1.4. Research Questions
The objectives of the research cited above have been met by searching for appropriate answers to
the following research questions:
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1. What do the statuses of NPLs of Ethiopian Private Commercial Banks in general and
NPLs status of BOA in particular looks like?
2. How to evaluate the major bank specific causes contributing to Non-performing Loans
of Ethiopian Private Commercial Banks with specific reference to BOA.
3. How to assess the impact that the cause (independent variable) namely Diversion of the
loan to other purpose other than the one originally agreed upon, have on Non-performing
Loans of private banks with specific reference to BOA?
4. How to assess the impact that the cause (independent variable); namely excessive
lending, have on Non-performing Loans of private banks with specific reference to
BOA?
1.5. Scope of the study
The scope of this study have an exclusive focus on the assessment of Non-performing Loans
(NPLs) and evaluate their Bank specific causes of private banks of Ethiopia with specific
reference to Bank of Abyssinia (BOA) through secondary data collection from achieves of senior
private banks.
Moreover, a survey of the perception of Bank of Abyssinia‟s (BOA‟s) management and staff
involved in credit activities, which accounts to the total population of 93 professionals have been
used to evaluate Bank specific causes of NPLs of private banks. Out the 93 professionals, 66 of
them were targeted to be selected. These include the managers of 3 corporate branches and 11
grade III branches, 3 managers of credit units, 19 H/O and District office Relation managers
(RMs), 30 officers (from Risk management officers, Credit review officers, portfolio officers,
credit analysis officers, credit administration officers).
Out of the total number of biggest branches‟ credit units managers, relations managers (RMs)
and credit officers involved in credit related operations, 73.6% the biggest branches managers,
75% of credit units managers, 66.7% Relations Managers (RMs) and 72.7% of credit officers
were taken as a target population; however only 58 of them have actually responded.
Further, the study has not incorporated branches of grade II and I at all and branches and district
offices lying out of the city of Addis Ababa.
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This has been deliberately limited to address the brevity of time and the cost implication that
really worth the researcher. Given the above scope, the researcher believed that the carefully
selected representatives greatly helped to bring sound findings which will lead to a rational
generalization.
1.6. Significance of the Study
The result of the research is of much importance to different stakeholders of private Banks in
general and BOA‟s Management and Employees in particular. Moreover, the researcher believes
that the research output will contribute for the development of the qualities of applicable credit
management and NPLs handling mechanism to management and employees of BOA in
particular and private banks in general. In specific terms, this study will help the banks to
identify and prioritize the causes affecting NPLs by examining the findings and
recommendations.
The study will initiate the banking industry to give due emphasis on the application of
identified variables.
In addition, it will give a hint to other researchers who may have interest to conduct somehow
detailed study on the subject.
1.7. Limitation of the Study
With respect to the specificity of the project, the research is confined to the research objective
and methodologies and doesn‟t incorporate other theoretical and conceptual matters in spite of
their relation to the study topic.
In addition, the scarcity of time has enforced the researcher to focus on only the main variables;
this may affect the generalization spectrum of the researcher.
1.8. Organization of the paper

This paper is organized into five chapters. Chapter one starts with presenting background of the
study, and statement of the problem. The second chapter focuses on review of related literature.
The third chapter deals with the research methodology. Chapter four deals with the data analysis
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and presentation and the fifth chapter contain the conclusion and recommendation of the study
including the direction for further study
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Chapter Two
2. Review of Related Literature
2.1. Historical Background of Banking In Ethiopia
The Ethiopian banking history reveals that banking in its modern sense, began towards the end
of the reign of Emperor Menilek II by the name Bank of Abyssinia that was an affiliate of the
National Bank of Egypt, and was founded in 1905. Since then, the banking industry has served
the country‟s economy with redundant ups and downs as a result of the instability of government
changes, political and economic policy formulations until the early 1990‟s, where the advent of
the idea of Economic Transformation that was widely propagated by the lately structured
Federal Government of Ethiopia.
To realize its ambition towards fast economic development, the government has devised a multi
faceted economic liberalization policy in the country in 1994. Among the contents of policies of
the government the most crucial one was the reform of financial institutions drawn in the
attraction of private sector banks that allowed the entry of new players and products which
smoothly facilitated financial operations through; (Monetary and Banking business proclamation
No. 83/1994) and (Licensing and Supervision of Banking Business proclamation No. 84/1994)
and consecutive amendments. Following the proclamations, 16 private banks have been
established, step by step, up to end of the year 2016 GC to play their financial Intermediary role
in the country. Among them Bank of Abyssinia (BOA) was established and stayed in operation
since February 1996.
2.2. Conceptual Framework
Referring concepts and definitions from the previous studies for the basement of the research is
appropriate. Therefore, the conceptual framework is intended to develop awareness and
understanding of the situation under scrutiny and communicate this effectively. According to
(Mugenda and Mugenda, 2003), conceptual framework involves forming ideas about
relationships between variables in the study.
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This study is focused to identify the major bank-and borrower-specific causes for the occurrence
of NPLs of DBE central region. International Journal of Scientific and Research Publications,
Volume 6, Issue 5, May 2016 661 ISSN 2250-3153 www.ijsrp.org
Accordingly, based on the objective of the study, the following conceptual model has been
framed. Non-performing Loans are affected by bank specific, customer specific and
macroeconomic factors as discussed in the literature review part. Bank specific factors include
poor credit assessment and credit monitoring, credit size, aggressive lending, compromised
integrity in approving and bank‟s great risk appetite, high interest rate, lenient/lax credit terms
whereas customer/borrower specific causes are loan diversion, poor credit culture of customers,
willful defaulting (Wondimagegnehu, 2012; Keeton and Morris, 1987; Rajiv & Dhal, 2003;
Pasha, S. & Khamraj, T., 2005; Jimenez and Saurina, 2005).
2.3. Financial (Loan) Asset
"Asset" is the resource that people owns, containing economic values. A financial asset is an
asset that allows future benefit in the form of a claim to cash (Pamela Peterson Drake, Frank J.
Fabozzi, 2010). Stock, bonds, options are examples of the financial asset.
There are creditors who own the financial asset and receive benefits from. Besides, there are
debtors, who will exploit benefits from someone's financial assets, and agree to make a payment
for that. Accordingly, financial assets can be defined in the relationship between creditors and
debtors.
2.4. Banks
Banks are the intermediaries, facilitating transactions in the capital market. Accordingly, banks
will account for creating more reliable transactions in the capital market. Banks will accomplish
two main functions, including funding from lenders and creditors, and lending the funds to
debtors. (Pamela Peterson Drake, Frank J. Fabozzi, 2010)
Banks act as payment agents by conducting checking or current accounts for customers,
paying cheques drawn by customers in the bank, and collecting cheques deposited to customers'
current accounts. Banks also enable customer payments via other payment methods such
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as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, and automated teller
machines (ATMs).
Banks borrow money by accepting funds deposited on current accounts, by accepting term
deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by
making advances to customers on current accounts, by making installment loans, and by
investing in marketable debt securities and other forms of money lending.
Banks provide different payment services, and a bank account is considered indispensable by
most businesses and individuals. Non-banks that provide payment services such as remittance
companies are normally not considered as an adequate substitute for a bank account.
Banks can create new money when they make a loan. New loans throughout the banking system
generate new deposits elsewhere in the system. The money supply is usually increased by the act
of lending, and reduced when loans are repaid faster than new ones are generated. In the United
Kingdom between 1997 and 2007, there was an increase in the money supply, largely caused by
much more bank lending, which served to push up property prices and increase private debt. The
amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700
billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks
increase their lending together, then they can expect new deposits to return to them and the
amount of money in the economy will increase. Excessive or risky lending can cause borrowers
to default, the banks then become more cautious, so there is less lending and therefore less
money so that the economy can go from boom to bust as happened in the UK and many other
Western economies after 2007.
2.5. Loans, and Performing Loans
The main functions of the banks are to fund and to lend. In other words, funds will be invested or
lending as loans. Loans are featured by a criterion, the performing capability. In finance,
a loan is the lending of money by one or more individuals, organizations, or other entities to
other individuals, organizations etc. The recipient (i.e. the borrower) incurs a debt, and is usually
liable to pay interest on that debt until it is repaid, and also to repay the principal amount
borrowed.
22
The document evidencing the debt, e.g. a promissory note, will normally specify, among other
things, the principal amount of money borrowed, the interest rate the lender is charging, and date
of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between
the lender and the borrower.
The interest provides an incentive for the lender to engage in the loan. In a legal loan, each of
these obligations and restrictions is enforced by contract, which can also place the borrower
under additional restrictions known as loan covenants. Although this article focuses on monetary
loans, in practice any material object might be lent.
Acting as a provider of loans is one of the main activities of financial institutions such as banks
and credit card companies. For other institutions, issuing of debt contracts such as bonds is a
typical source of funding.
A performing loan is a debt on which the borrower has historically made payments on time.
For example, if a homeowner takes out a mortgage and pays his home loan faithfully each
month, his mortgage is considered a performing loan. In some cases, loans in which payments
are less than 90 days late may be considered performing.
As defined by the Federal Financial Institutions Examination Council, a loan that is less than 90
days past due, has not been placed on nonaccrual,or is not in workout status.
Performing loans are loans that are paid principals and interest timely back to banks. Performing
loans ratio is an important criterion for managing an effective bank.
2.5.1. Non-performing loans
Non-performing loans are loans that are in default, or close to being in default (Investopedia.
com). Similar to other business areas, capital market contains different types of risk with a
certain level. Internationally, people have listed out various types of risk in lending market, in
which the most notable is credit risk. "Credit" is the monetary lending relationship in which
debtors pay the obligation of principal and interest in the period regarding loan term. The credit
risk is the risk of the situation in which debtors are unable to pay either principal or interest, or
both.
23
A non-performing loan is a debt on which the borrower is late on making payments or is in

danger of missing payments. Loans where the borrower is 90 days late on payments are
considered non-performing, but any loan in default or near default may also be called non-
performing. Lenders take a variety of steps to avoid and mitigate the impact of non-performing
loans, such as denying loans to especially risky borrowers and charging higher interest rates to
borrowers with lower credit scores.
2.5.2. The Definition of Non-Performing Loans
The most common international recognized definition of non-performing loan, known as NPL
was actually developed by the IMF in the framework of the Financial Soundness Indicators
(FSIs) endorsed by the IMF Executive Board. On March 2006, the Financial Compilation
Indicators stated that loan would fall under the non-performing loan when the payment of its
principal and interest had passed the due date by the period of 3 months or 90 days or more.
Non-performing loan can also be defined as an interest payment, which is the same as 3 months
or 90 days interest or more that has been capitalized, refinanced, or rolled over. The 3 months or
90 days criterion is the time period that is most widely used by the countries to determine
whether or not a loan is non-performing.
Non-Performing Loans are popularly known as non-performing assets. Commercial Banks loans
are of various types. All those loans which generate periodical income are called as Performing
Loans (PLs). While all those loans which do not generate periodical income are called as Non-
Performing Loans (NPLs). If the customers do not repay principal amount and interest for a
certain period of time then such loans become non-performing loans (NPLs). Thus non-
performing assets are basically non-performing loans (McNulty et al, 2001). A loan that is not
earning income and: (1) full payment of principal and interest is no longer anticipated, (2)
principal or interest is 90 days or more delinquent, or (3) the maturity date has passed and
payment in full has not been made.
(Andrew Crockett 2003) argues that originally non-performing loans (NPL) may not appear to
have a severe negative result. Banks remain liquid and depositors maintain their confidence in
the system. Over time, however, the size of the problem grows, especially if banks are allowed to
accrue interest on their non-performing loans (NPL). Besides that, (Zeng, 2012), in his paper
supports the following hypothesis by considering the situation in China: the equilibrium values
24
of the bank NPL is dependent on micro-economic factors but influenced by macro-economic

factors include the degree of openness to the outside world and government policy. Based on the
model, to obtain a decrease in the NPLs in China, the banks‟ internal management effort must be
enhanced. Furthermore, (Washington, 2012) in his paper showed that the macroeconomic
environment is viewed as a critical driver for Non-performing Loans.
2.6. Loan factors
According to (Derban et al. 2005), the causes of non-repayment could be grouped into three
main areas: the inherent characteristics of borrowers and their businesses that make it unlikely
that the loan would be repaid. Second, the characteristics of lending institution and suitability of
the loan product to the borrower, which make it unlikely that the loan would be repaid. Third, is
systematic risk from the external factors such as the economic, political and business
environment in which the borrower operates.
The study found that Domestic credit and inflation to private sector by the commercial banks
was found negative and related to credit risk. However, lending interest rates were positive and
significant to credit risk.
The SNA 1993 (Statistical National Account) defined the principles for every country to follow,
rather than to make a specific recommendation for country accounting standards. The principle
of the non-performing loans is therefore, to clearly state the loans given the fact that contractual
payments may not be done and also to identify the potential losses to both income and capital.
(Ijbm.ccsenet.org International Journal of Business and Management Vol. 12, No. 2; 2017)
2.7. Non-performing loans provision
Non-performing loans provision is a mechanism over expected losses of Non-performing Loans.

Practically appliance showed that the high ratio of non-performing loans requires the larger
amounts of efficient provision. (Hasan and Wall, 2004)
Banks and credit unions are in the business of lending money to individuals, families and
businesses. But not every loan is repaid in full; in fact, many banks lend to risky borrowers by
25
charging high interest rates. To stabilize earnings and remain solvent in bad times, banks
estimate losses and seek to hold enough capital to absorb future write-offs.
A loan loss provision is an expense set aside as an allowance for uncollected

loans and loan payments. This provision is used to cover a number of factors associated with
potential loan losses, including bad loans, customer defaults, and renegotiated terms of
a loan that incur lower than previously estimated payments
2.8. The level of success of NPLs mitigating actions
Since banking crises in emerging economies has multiple causes, there is no single solution to
them (Tirapat 1999). However, (Goldstein and Turner 1996) suggest that there are several
measures that can significantly reduce the incident of each of the factors underlying banking
crises. For example, greater macroeconomic stability, a larger role for foreign owned banks, the
wider use of market-based hedging instruments and higher levels of bank capital would help to
make the consequences for the domestic banking system less damaging.
Limiting the allocation of bank credit to particularly interest-rate-sensitive sectors, close

monitoring of lending by weakly capitalized banks and employing the right mix of
macroeconomic and exchange rate policies would similarly limit vulnerability to lending booms,
asset price collapses and surges of capital inflows, content (Goldstein and Turner 1996). Strict
asset classification and provisioning practices could reduce the increases of bad loans and
protection against loan losses (Tirapat 1999) agrees with Goldstein and Turner on the role of
Government in determining to a great extent the success of efforts to managing such crises. It
starts out by reviewing the banking structure, problems faced and some of the causes of recent
banking crises. Drawing from the experience of 23 countries Tirapat gives some of successful
guidelines all of which show the important role of government in its regulatory role.
According to the (Bank of Japan 2003), the remedies to the problem of Non-performing loans
can be grouped into three broad categories, all of which work towards enhancing the banks‟
earning power. First is to further improve efficiency through cost reduction. Secondly is to
pursue a new lending strategy backed by appropriate credit risk evaluation, and third is to
provide new financial services to increase fee income.
26
In China for example, one method that has been successfully used is turning over the non-
performing assets/loans to Asset management companies (China Daily, 2002). According to
(Reddy 2002), appropriate provisioning for non-performing assets (up to 50% of gross
nonperforming assets) has been successfully used to cushion banks agents the debilitating effects
of non-performing loans.
According to the (Central Bank of Kenya CBK 1999), Formation of a Credit Reference Agency
where banks can exchange information on the bad borrowers is one method on trial.
Furthermore, a private sector credit reference bureau is now in operation, but its full operation
has been hampered by lack of legislation that may allow banks to exchange information.
According to (CBK 2001), improvement in the County‟s judicial system is critical for a speedy
resolution to the NPLs problem. While formation of Credit Reference Bureaus and improvement
in the credit risk assessment may prevent future loans becoming delinquent, the current stock of
the non-performing loans needs to be quickly resolved.
The success of this would be possible if the judicial and court systems are operating efficiently.
A number of initiatives have been taken (Nelson M. Waweru & Victor M Kalani 2009.).
2.9. Empirical Evidence.
2.9.1. Empirical evidence of non-performing loans in some countries
Researchers suggest that what is largely missing from the research literature related to the field
of financial institutions is an analysis of the relationships between problem loans and cost
efficiency. Recent empirical literature suggests at least three significant links between these two
topics.
First, a number of researchers have found that failing banks tend to be very cost inefficient, that
is, located far from the best-practice frontiers. Cost-inefficient banks may tend to have loan
performance problems for a number of reasons; For example, banks with poor senior
management may have problems in monitoring both their cost and their loan customers, with the
losses of capital generated by both these phenomena potentially leading to failure. This has been
referred to as the "bad management" hypothesis. Alternatively, loan quality problems may be
27
caused by an event exogenous to the bank, such as unanticipated regional economic downturns.
The expenses associated with the non-performing loans that results can create the appearance, if
not the reality, of low cost efficiency. This has been referred to as the "bad luck" hypothesis.
The second empirical link between problem loans and productive efficiency appears in studies
that use supervisory examination data. A relationship between asset quality and cost is consistent
with the failed bank data, and suggests that the negative relationship between problem loans and
cost efficiency holds for the population of banks as a whole as well as for failing banks. Third,
some recent studies of bank efficiency have directly included measures of non - performing loans
in cost or production relationships. Whether this procedure improves or hinders the estimation of
cost efficiency depends upon the underlying reason for the relationship between costs and Non-
performing Loans.
Empirical evidences and results from studies show similar trends on the negative effect of non-
performing loans on bank performances. Current global financial crisis attests to this direction.
In Turkey, Karabulut and Bilgin (2007) carried out a study with the purpose of examining the
impact of the unlimited deposit insurance on Non-performing Loans (NPLs) and market
discipline. They argued that deposit insurance program play a crucial role in achieving financial
stability. Governments in many advanced and developing economies established deposit
insurance schemes for reducing the risk of systemic failure of banks.
The report shows that deposit insurance has a beneficial effect of reducing the probability of a
bank run. However deposit insurance systems have their own set of problems. Deposit insurance
systems create moral hazard incentives that encourage banks to take excessive risk. Turkey
established an explicit deposit insurance system in 1960. Until 1994, the coverage was
determined by a flat rate but in that date, Turkey experienced a major economic crisis. In April
1994, Turkish government had to establish an unlimited deposit insurance scheme to restore
banking system stability. In conclusion, the study shows that unlimited deposit insurance caused
a remarkable increase at Non-performing Loans (NPLs). What this means is that deposit
insurance institutions established by monetary authorities must re-examine the current policy of
blanket guarantee of deposits in the banking sector.
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In Taiwan, Hu, Li and Chu (2004) carried out their own study examining how ownership
structure affects Non-performing Loans (NPLs). Their findings revealed that an increase in the
government's shareholding facilitates political lobbying. On the other hand, private shareholding
induces more Non-performing Loans (NPLs) to be manipulated by corrupt private owners. The
results show that the rate of NPLs decreased as the ratio of government shareholding in a bank
rose (up to 63.51%), while the rate thereafter increased. The report posits further that joint
ownership has the lowest rate of NPLs among Taiwanese public, mixed and private commercial
banks. The joint ownership effect on NPLs ratios is negative and its magnitude is sufficiently
large in Taiwan's banking industry. Bank size is negatively related to the rate of NPLs, which
supports their argument that larger banks have more resources for determining the quality of
loans.
In Africa, Fofack (2005) investigated the determinants of non-performing loans in sub- Saharan
Africa using correlation and causality analysis. The analysis was based on data drawn from 16
African countries. The sample selection was dictated by the scope of the database and
availability of financial information on these countries. The data are provided on an annual basis
end-of-period, between 1993 and 2002, included. The minimum length of the panel covers a
period of 3 years for the shortest series (Chad and Rwanda), and up to 10 years for the longest
series, producing an unbalanced panel. The correlation and causality analysis focuses on a
number of macroeconomic and microeconomic (banking-sector) variables. At the
macroeconomic level, the study investigates the correlation between Non-performing Loans and
a subset of economic variables: per capita GDP, inflation, interest rates, changes in the real
exchange rate, interest rate spread and broad money supply. At the microeconomic level, it
focuses on the association between Non-performing Loans (NPLs) and banking-sector variables.
The key banking variables include return on asset and equity, net interest margins and net
income, and inter-bank loans. These variables were chosen in the light of theoretical
considerations and subject to data availability. Non-performing Loans (NPLs) are adjusted for
specific provisions (non-performing loans as a proportion of loans loss provisions) to provide the
basis for cross-country comparisons. In the correlation analysis, the results showed a negative
29
association between real GDP per capita and non-performing loans expressed as a percentage of
loans loss provision.
This implies that falling per capita income is associated with rising scope of Non-performing
Loans (NPLs) to the extent that changes in per capita income is proxy for changes in economic
growth. The negative association with non-performing loans may reflect the impact of cyclical
output downturns on the banking sector; a result that is expected in the literature (Gonzalez-
Hermosillo (1997)). The sign of the coefficient is consistent across state and private banks,
though the magnitude of the correlation is stronger for state banks and financial institutions.
As per Empirical Evidence on NPLs in the context of Pakistani Banking Sector, all NPLs do not
directly influence financial crisis in any country but these have a negative impact on economy of
a country. This concept is supported by studies of Drees & Pazrbasioglu (1998) and Kaminsky
and Rreinhart (1999). During the years 1997 to 1999, the rate of NPLs has shown an increasing
trend (from 9% to 50%) in Asian countries like Singapore, Hong Kong, Malaysia, Philippines
and Taiwan. NPLs in Pakistan are on a roller coaster ride because according to report of State
Bank of Pakistan (SBP), amount of NPLs of banking sector, in the year 2012, has reached to
Rs.176.77 billion. Therefore, there is dire need of studying about Non-Performing Loans and its
factors. The study of Brownbridge (1998) explains that Non-Performing Loans are one of the
chief reasons for the failure of many banks in the world. In addition if these Non-performing
Loans are not controlled then the resources of a concern are blocked and thus resulting in low
profitability.
Banks in recent years are facing default risk, which is one of the major causes of banks‟ failure.
Pakistani banking sector is facing four types of risks. These are Market risks, Credit risks,
Liquidity risks and Operational risks. Problem arises when the borrowers fail to return the loans,
thus increasing Non-Performing Loans (NPLs) and declining profitability (Haneef, et al., 2012).
Therefore, there is a need to study the factors of Non-Performing Loans in setting of Pakistani
banking sector.
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2.9.2. Empirical Evidence on factors affecting non-performing loans

Many researchers have conducted a lot of study on determinants of Non-performing Loans
(NPLs), due to its significance for the bank‟s failure. Accordingly, the following subsection,
presents factors affecting Non-performing Loans in other countries.
Credit approving that has not properly considered the credit terms would potentially lead to
occurrence of loan default. As per the study by Jimenez & Saurina (2005) on the Spanish
banking sector from 1984 to 2003 NPLs are determined by lenient credit terms. The authors
indicated that the causes for the leniency were attributed to disaster myopia, herd behavior,
moral hazard and agency problems that may entice bank managers to take risk and lend
excessively during boom periods. This has International Journal of Scientific and Research
Publications, Volume 6, Issue 5, May 2016 660 ISSN 2250-3153www.ijsrp.org been supported
by Rajiv & Dhal (2003) who found that terms of credit determines occurrence of non-
performing loans.
On the other hand, banks that charge high interest rate would relatively incur a higher default
rate or non-performing loans. In this regard, a study by Sinkey & Greenwalt (1991) on large
commercial Banks in US revealed that a high interest rate charged by banks is associated with
loan defaults. Rajiv & Dhal (2003) who used a panel regression analysis indicated that financial
factors like cost of credit have got significant impact on NPLs. Bloem and Gorter (2001) also
indicated that “bad loans” may substantially rise due to abrupt changes in interest rates. The
authors discussed various international standards and practices on recognizing, valuing and
subsequent treatment of non-performing loans to address the issue from view point of
controlling, management and reduction measures. Similarly, a study by Espinoza and Prasad
(2010) focused on macroeconomic and bank specific factors influencing NPLs and their effects
in GCC Banking System found that higher interest rates increase non-performing loans but the
relationship was not statistically significant.
Other studies such as Sinkey & Greenwalt (1991) indicated that loan delinquencies are
associated with rapid credit growth. The authors found that excessive lending explain loan loss
rate. This was confirmed later by Keeton (1999) who used data from commercial banks in the
United States (from 1982 to 1996) using a vector auto regression model showed that there was
31
association between default and rapid credit growth. Likewise, Salas and Saurina (2002) in their
study on Spanish banks also revealed that credit growth is associated with non-performing
loans. Also, study by Bercoff et al. (2002) confirmed that asset growth explains NPLs. Skarica
(2013) also conducted a study on the determinants of NPLs in Central and Eastern European
countries. By employing the Fixed Effect Model and seven Central and Eastern European
countries for 2007-2012 periods, the study revealed that loan growth, real GDP growth rate,
market interest rate, unemployment and inflation rate as determinants of NPLs. The results show
that GDP growth rate and unemployment rate have statistically significant negative association
with NPLs with justification of rising recession and falling during expansions and growth has
impact on the levels of NPLs. This implies that economic developments have a strong impact on
the financial stability. The result also discovered that inflation has positive impact on NPLs with
a justification that inflation might affect borrowers‟ debt servicing capacities. Similarly, Jimenez
and Saurina (2005) provide evidence that non-performing loans are determined by GDP growth,
high real interest rates and lenient credit terms. Meanwhile, Rajiv & Dhal (2003) utilize panel
regression analysis and reported that favorable macroeconomic conditions and financial factors
such as maturity, cost and terms of credit, banks size, and credit orientation impact significantly
on the non-performing loans of commercial banks in India. Likewise, Keeton (1999) revealed
evidence of a strong relationship between credit growth and impaired loans. Specifically,
Keeton (1999) showed that rapid credit growth, which was associated with lower credit
standards, contributed to higher loan losses in certain states in the US. Boudriga et al. (2009)
studied on the lender specific factors and the role of the business and the institutional
environment on loan default in the MENA countries for 2002-2006 periods using random-
effects panel regression model for 46 countries. The variables included were credit growth rate,
capital adequacy ratio, real GDP growth rate, ROA, the loan loss reserve to total loan ratio,
diversification, private monitoring and independence of supervision authority on Non-
performing Loans. They reported that credit growth rate was negatively related to Non-
performing Loans. Capital adequacy ratio was positively and significantly affecting loan default
implying that highly capitalized banks are not under regulatory pressures to reduce their credit
risk and take more risks. In the contrary, their findings reported that ROA has negative and
statistically significant influence on NPLs.
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2.9.3. Empirical Studies in Ethiopia and highlights of the knowledge gap

emerged from survey of empirical literature.
In his study “determinants of NPLs on commercial banks of Ethiopia” Wondimagegnehu (2012)
revealed that underdeveloped credit culture, poor credit assessment, aggressive lending, messed
up loan monitoring, lenient credit terms and conditions, compromised integrity, weak
institutional capacity, unfair competition among banks, willful defaults by borrowers and their
knowledge limitation, fund diversion for unexpected purposes and overdue financing has
significant effect on NPLs. Conversely, the study indicated that interest rate has no significant
impact on the level of commercial banks loan delinquencies in Ethiopia.
Similarly, Mitiku (2014) studied the “Determinants of Commercial Banks Lending: Evidence
from Ethiopian Commercial Banks using panel data of eight commercial banks in the period
from 2005 to 2011 with the objective of assessing the relationship between commercial bank
lending and its determinants (bank size, credit risk, GDP, investment, deposit, interest rate,
liquidity ratio and cash required reserve). Based on seven years financial statement data of eight
purposively selected commercial banks and using Ordinary Least Square (OLS) technique, the
study found that there was significant relationship between commercial bank lending and its
size, credit risk, gross domestic product and liquidity ratio. While interest rate, deposit,
investment, and cash reserve required do not affect Ethiopian commercial bank lending.
In view of the above discussions, numerous studies were conducted on the determinants of Non-
performing loans. Most of these studies focused on Bank specific and Macro-economic
determinates of NPL. However, in the previous empirical analysis no study has been conducted
on customer-specific factors influencing non-performing loans. Besides, most of the empirical
studies reviewed and discussed in the above paragraphs were made in other countries; and
studies in Ethiopian commercial banking sector are scant. Moreover, despite a single study by
Wondimagegnehu (2012) on the determinants of NPLs of commercial banks in Ethiopia, no
further research has been conducted in the banking sector in general and on Development Bank
of Ethiopia (DBE) in particular. Therefore, this study is expected to fill the gap by assessing the
association between bank-and customer-specific factors and level of Non-performing Loans
(NPLs).
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Chapter Three
3. RESEARCH METHODOLOGY
3.1. Introduction
The study was aimed to make assessment on Non-performing Loans (NPLs) and Evaluation of
their causes in Ethiopian Private Banks with specific reference to BOA. This chapter touches on
the overall methodology used in the study. It will adopt the following structure: First the research
design was described, then population and sample, data collection methods, research procedures
and data analysis methods to be followed in the research process.
This study has been conducted on the basis of both primary and secondary data sources.
Primary data was collected through questionnaire and short interviews of management and staff
of the BOA. Both quantitative and qualitative research methods have been applied in this
research. The quantitative and qualitative data was used to address the research questions.
Secondary data on the other hand were depend on archive records of 12 private banks and
reviews of related literature from books, websites and outputs of past researchers who
conducted a research on similar topics.
3.2. Research Design

Research design is a plan of action specifying the methods and procedures for collecting and
analyzing the required data. As stated by (John, 2007) the choice of research design depends on
objectives that the researchers want to achieve. With this perspective, therefore, this research was
a descriptive research that adopted the survey and content analysis research. Survey research is
used for collecting primary data based on verbal or written communication, in our case
questionnaire and interview. whereas content analysis is used to make replicable and valid
inferences by evaluating, interpreting and coding textual material or archival data, which base
itself on secondary source of data.
34
Since this study was designed to assess the status of NPLs of private banks and to evaluate the
relationships between NPLs and bank specific causes for the occurrence and rise of NPLs, a
logical reasoning mainly related to deductive reasoning is required. Because deductive reasoning
is applicable for quantitative research. Thus, due to quantitative nature of data, the researcher
used deductive reasoning in order to make descriptive analysis. However, a sort of qualitative
nature of data is also given due respect. To this end therefore, the researcher tried to use an
archival data that extends from 2009 to 2018 period on twelve private banks on top of data
collected through questionnaire and interview.
3.3. Target population
A population is the total collection of elements about which we wish to make some inferences.
The collection of all possible observations of a specified characteristic of interest is called a
population while a collection of observations representing only a portion of the population is
called a sample.
The population to be used in this research comprised of Management and staff members of BOA
who are necessarily involved in the credit operation were treated as the population of this study.
The total size of population is 93 in number. Out of the 93 Managers and staffs involved in
credit operation, 66 (which accounts to 71%) of them were selected as they were ascertained to
reside in the city of Addis Abeba. More specifically the targeted population (managers and
staffs) are composed of 3 corporate branch managers and 16 grade III branch managers, 25
Relation managers (RMs), 5 different credit units managers, and 20 officers (i.e., 3 risk
management officers, 8 compliance officers, 6 loan portfolio officers, 3 loan workout officers) ,
17 credit analysis and appraisal officers, 7 loan review and monitory officers, out of which 66
were selected. Apparently, questionnaires were distributed to all these 66 respondents. Out of
them only 58 respondents have dispatched the questionnaires with their response except one sent
unresponded.
Besides, opinion and expert advice have been sought through interviews from four management
members of BOA.
35
3.4. Sampling Technique
The sampling technique used in this research is Non probability sampling within which
Deliberate or Purposive sampling method has been employed for the survey questionnaire.
Cooper and Schindler (2001) define this sampling frame as a list of elements from which the
sample is actually drawn, which is closely related to the population. The sample of 66
management and other staffs of BOA was drawn, based on the experience they have on credit
operation
This method was used because it enabled the researcher to use judgment in selecting cases that
best enable the researcher to answer the research questions and to meet the objectives (Saunders
et al, 2000). More specifically, critical case sampling was used.
According to Saunders et al, this method selects critical cases on the basis that they can make a
point dramatically or they are important. The focus of data collection was to understand what
happens in each critical case so that logical generalizations could be made. The research findings
can then be applied to other private banks as they all follow the same operational procedure and
experience and attract similar credit customers. The sample size was determined using purposive
technique to reach at somewhat reliable conclusion.
3.5. . Data Collection Techniques
Quantitative Data – The source of the quantitative data used for this research is the survey
questionnaire and interview. Moreover, secondary data was also collected from archives of the
twelve senior private banks.
Qualitative Data – Qualitative data used for this research was expected to be generated through
questionnaire, from management and officers involved in credit operation at corporate and grade
III branches, Head office and District offices residing in the city of Addis Ababa. Moreover, it is
also generated through interviews that were held with: 1 Department Director, 1 Division
Manager, 1 Branch Manager, and 1 Relation Manager.
36
3.6 Data Analysis and Presentation
The collected data passed through a process of cleaning to get rid of any overlaps or unnecessary
data or mismatching the research theme.
The collected data was subject to descriptive analysis to answer the research questions. The
analysis was made using the SPSS software package. These included frequencies, descriptive
statistics of means and standard deviations. Spreadsheets were also used in order to come up with
appropriate tables for data presentation, while total scores were used to rank the responses.
Moreover, triangulation and narrative data analysis was also comprised the analysis of the
qualitative data.
3.7. Dependent variable
The major item specified in the statement of the problem that triggered the conduct of this
research paper is the Non-performing Loans (NPLs) that occurs in private commercial banks of
Ethiopia considered to be Dependent Variable.
3.8. Independent Variables
Independent variables are the bank specific factors evaluated by the researcher of this thesis
which have their own impression on the occurrence of NPLs in Bank of Abyssinia (BOA). These
independent variables include; poor credit risk assessment, poor credit monitoring, collateral,
Granting loan to highly levered borrowers, Loan divert ion, Borrowers orientation, and Bank
size,
3.9. Model Specification
The model designed for the conduct of the evaluation part of the causes of NPLs that is majorly
used to show the cause and effect relationship of the independent variables selected to be
evaluated with that of the dependent variable.
This model is specified to determine how the seven bank specific factors (independent variables),
including; poor credit risk assessment(PCRA), poor credit monitoring(PCM), collateral(C),
37
Granting loan to highly levered borrowers (LHLB), Loan divert ion(LD), Borrowers
orientation(BO), and credit size(CS); do impact the occurrence and rise of NPLs (the dependent
variable).
The regression model which is existed in most literature has the following
general form;
Yit= βo + βXit + εit
Where: - Yit is the dependent variable for firm „i‟ in year „t‟, β0 is the constant term, β is the
coefficient of the independent variables of the study,
-X it is the independent variable for firm „i‟ in year ‘t’ and εit the normal error term.
Thus, this study is based on the conceptual model adopted from (Fawad and Taqadus 2013).
Accordingly, the estimated models used in this study are modified and presented as follow;
NPLit= β0 +β1(PCRA)it + β2(PCM)it+ β3(C)it+β4(LHLB)t+ β5(LD)it+ β6(BO) it+ β7(CS)it+εit
Where;
- β0 is an intercept
-β1, β2, β3, β4, β5, β6, and β7represent estimated coefficient for specific bank i at time t ,
-PCRA, PCM, C, LHLB, LD, BO, and CS represent poor credit risk assessment(PCRA), poor
credit monitoring(PCM), collateral(C), Granting loan to highly levered borrowers (LHLB), Loan
divert ion(LD), Borrowers orientation(BO), and credit size(CS), respectively
-εit represents error terms for intentionally/unintentionally omitted or added variables. It has zero
mean, constant variance and non- auto correlated. The coefficients of explanatory variable were
estimated by the use of ordinary least square (OLS) technique.
38
Model specifying how the selected independent variables
impact the occurrence and rise of NPLs
Fig. I
Independent Dependent
Variables Variable
Poor Risk assessment
Poor credit Monitoring
,
Collateral The occurrence/rise
MMonitoringssessment
Of Non-performing
Granting loan to highly
levered borrowers Loans (NPLs)
Loan divert ion
Borrowers‟ orientation
Credit size
39
Chapter Four
4. Findings and Discussions
4.1. Introduction
The purpose of this paper is to present and explain the data collected in the course of the thesis
work. The findings are presented and analyzed on the basis of the research questions, which are
related to the assessment of NPLs and evaluation of their causes in private banks of Ethiopia.
4.2. Data collected from Private commercial Banks.
The purpose of secondary data collected from Private Banks is to enable the researcher make
assessment on the condition of Non-performing Loans (NPLs) of private Banks.
The data collected in this regard were an archive data of the last ten years (from 2009-2018GC)
that were found highly scarce due to conservative nature of the Banks in keeping the secrecy of
some of their records, especially records of NPLs. As a result, out of the past ten years data
requested, only data of NPLs of the last three years on most Banks were managed to be
collected.
Therefore, the researcher is obliged to make analysis on the data available at hand.
As per the assessment made on the data collected, NPLs status of private Banks has been
significantly reduced even by far below the 5% requirement set by National Bank Ethiopia
(NBE), except few Banks like Wegagen Bank 12.99% in 2018, and Zemen Bank 5.48% in 2018
failed to minimize the NPLs records of their Bank to the level of NBE requirement.
Out of the entire data set collected, the following table represents the last three years Non-
performing Loans (NPLs) and NPLs ratio data of the captioned twelve Banks
40
Table 4.2.1 Three Years NPLs data of Private Banks
Banks Type of Data 2016 2017 2018
BOA NPLs 170,301 195,151 234,578

NPLs ratio 2.10% 1.38% 1.30%
Awash NPLs 304,694.00 437,163.00 582,880.00
NPLs ratio 1.86 % 1.94 % 1.97 %
Dashen NPLs 795,657.00 625,326.00 795,657.00
NPLs ratio 3.42 % 3.46 % 3.42 %
United Bank NPLs 156,919.0 91,768.00 308,410.0
NPLs ratio 1.84 % 0.76 % 2.05%
Wegagen NPLs 129,041.00 131,797.00 1,954,255.00
NPLs ratio 1.69 % 1.27 % 12.99 %
NIB NPLs 390,466 359,443 655,720
NPLs ratio 5.11 % 3.30 % 4.78 %
CBO NPLs 1,278,424 575,228 534,203
NPLs ratio 2.07% 5.79% 3.52%
Lion NPLs 98,258 138,700 172,841
NPLs ratio 2.24% 2.24% 2.24%
Bunna NPLs 121,485 148,444 268,269
NPLs ratio 3.29% 2.83% 3.86%
OIB NPLs 164,104 244,850 389,402
NPLs ratio 3.12% 3.41% 3.87%
Zemen NPLs 205,679 823,259 285,831
NPLs ratio 6.04% 19.79% 5.48%
Birhan NPLs DNA DNA DNA
NPLs ratio DNA DNA DNA
Source: own computation based on surveyed Banks DNA= Data not available
As displayed in the table above, the performance of all private banks from which the above data
were collected, in terms of NPLs, is in a good position, (i.e., below 5% of the requirement of
NBE) except Wegagen and Zemen Banks scored a record high negative performance of 12.99%
and 5.48%, NPLs ratio, respectively, during the year 2018. This shows that the economic
environment is not a threat for private banks especially in terms of NPLs management. If at all it
happens, it is the problem of the Banks management failure.
4.3. Respondents View collected through Interview on different issues

related to NPLs of BOA.
This section discusses items worth to mention about view points of management staff of BOA on
the course of Interview session.
41
The major point stressed here was that NPLs position that appears at quarterly reports are usually
escalating up but when it comes to annual reports the NPLs ratio goes down to the level of the
requirement of NBE. The reason for such incidence is that customers used to be lenient while
making monthly, quarterly and even sometimes semiannual repayment specially when the
repayment course fall during middle terms. Whereas, they usually rash to make their repayments
when the period falls at the end of yearly closing.
Besides, all the management staff stressed that the two most important factors triggering the
occurrence and rise of NPLs are; loan divert ion and highly levered lending. From this the
researcher concluded that the caption two factors are the most important reasons for the
occurrence and rise of NPLs of BOA.
4.4. Respondents view on Bank specific factors attributed to NPLs in

Bank of Abyssinia (BOA).
As well discussed in the thesis banks used to face difficulties for a multitude of reasons, the
major cause of serious banking problems continues to be directly related to NPLs as a result of
many macro and micro factors. However, the very nature of this study was to specifically
examine seven bank specific factors (independent variables), including; poor credit risk
assessment, poor credit monitoring, collateral, Granting loan to highly levered borrowers, Loan
divert ion, Borrowers orientation, and Credit size that were considered to contribute to the
occurrence and rise of NPLs (dependent variable) in BOA. To evaluate the above factors (causes
of NPLs) respondents‟ viewpoints have been collected and summarized as follows.
4.5. The summary of general profile of the respondents
Although the targeted number of respondents was 66 in total, only 58 of them have returned the
questionnaire with their full response, except one questionnaire that was left unattended. The
general profile of these respondents is summarized in table 4.5.1 below.
42
Table 4.5.1. Summary of general profile of the respondents

Frequenc percentage
y (%)
Position in the Bank Loan officer 13 22.8%
Credit Analyst 10 17.5%
Monitoring/Recovery
6 10.5%
officer
Relationship Manager 6 10.5%
Credit Director 0 0.0%
Chief Officer 0 0.0%
Others 22 38.6%
Experience in Banking Less than One Year 0 0.0%
Industry
1-5 Years 5 8.8%
6-10 Years 24 42.1%
11-15 Years 22 38.6%
Above 15 Years 6 10.5%
Experience in credit Less than one Year 0 0.0%
processes
1-5 Years 20 35.1%
6-10 Years 37 64.9%
11-15 Years 0 0.0%
Above 15 Years 0 0.0%
Ownership of the Bank Private 57 100.0%
you work for
State owned 0 0.0%
Source: own computation based on surveyed Banks Using SPSS software
As shown in table 4.5.1. above about 40% of the respondents were composed of loan officers
and credit analysts in their position and about 38% categorized under other were composed of
corporate and grade III branch managers and different credit units‟ managers.
43
With respect to the experience the respondents have in the banking industry, about 80% of them
have 6-15 years of experience in the sector and all of the respondents have 1-10 years of
experience in credit operations. This shows that the targeted respondents are more professionals
and are well experienced officers. Hence the researcher came to conclude that the respondents
experience helps to reach acceptable reasoning and valid generalization.
4.5.2. Regarding the clarity of determinant factors of NPLs, the view points of the
respondents are presented under table 3 below.
Table 4.5.2. Determinants of NPL are obvious
Cumulative
Frequency Percent Valid Percent Percent
Valid Agree 42 72.4 73.7 73.7
Neutral 12 20.7 21.1 94.7
Disagre
3 5.2 5.3 100.0
e
Total 57 98.3 100.0
Missing System 1 1.7
Total 58 100.0
Source: own computation based on surveyed Questionnaire Using SPSS software
Table 4.5.2. revealed that about 72% of respondents have shown their agreement by ticking
“Agree’ with the clarity of determinant factors of NPL and about 21% of them have taken the
position of „Neutral‟. This shows that determinant causes of NPLs are well known by the
majorities of the credit and credit related workers.
44
4.5.3 Identifying important determinant factors of NPLs in Ethiopian private banks by

their importance.
Table 4.5.3 Ranking the factors of NPLs in BOA
Cumulative
Frequency Percent Valid Percent Percent
Valid High leverage/excessive

19 32.8 33.3 33.3
lending
Loan divertion 28 48.3 49.1 82.5
lenient credit terms 2 3.4 3.5 86.0
Credit
2 3.4 3.5 89.5
culture/Orientation
Poor
2 3.4 3.5 93.0
monitoring/followup
Poor risk assessment 4 6.9 7.0 100.0
Total 57 98.3 100.0
Missing System 1 1.7
Total 58 100.0
Source: own computation based on surveyed Banks Using SPSS software
As depicted in table 4.5.3, Loan divert ion (by 49% of respondents) and High
Leverage/excessive lending (by 33.3% of the respondents) were rated to be the 1st and 2nd most
important factors that contribute to the occurrence and rise of NPLs. The factors/causes like
„poor credit Risk assessment” (7%) took the 3rd position and others; like „poor monitoring and
follow up‟, and „lenient/lax credit terms‟ and „credit culture‟ took the 4th position by 3.5% share
of the entire response, each.
45
The pie chart portrayed below clearly depicts the rank of factors by percentage
share.
Figure II
4.5.4. The effect of Poor Credit Risk Assessment

Table 4.5.4. Poor Credit Risk Assessment
Frequency percentage (%)
Easly admited borrowers usually Strongly Agree 6 10.5%

default
Agree 38 66.7%
Neutral 11 19.3%
Disagree 2 3.5%
Strongly Disagree 0 0.0%
46
KYC policy of the Bank lead to high Strongly Agree 16 28.1%

loan quality
Agree 39 68.4%
Neutral 2 3.5%
Disagree 0 0.0%
Poor credit analysis and risk Strongly Agree 35 61.4%

assessmet lead to loan default
Agree 22 38.6%
Neutran 0 0.0%
Disagree 0 0.0%
Project appraisal and selection Strongly Agree 8 14.0%

officers and mgrs are qualified and
skilled enough Agree 42 73.7%
Neutral 7 12.3%
Disagree 0 0.0%
Table 4.5.4. emphasizes on responses given to each of the four sub questions under the package
of „Poor Credit Risk assessment factor‟. For all sub questions majority of the respondents
positively showed their agreement to the researchers view point in respect to the importance of
„credit risk assessment‟ to avoid the occurrence and rise of NPLs by selecting „agree‟ and
„strongly agree‟.
In this respect about 74% of the respondents declared by saying “agree”, 14% of the respondents
said “strongly agree” and 13% of respondents selected “neutral”. In conclusion, it is obvious that
about 88% of the respondents supported that „Poor monitoring‟ have a positive impact on the
occurrence and rise of NPLs.
47
Table 4.5.4.1. Descriptive Statistics on Poor Credit Risk Assessment factor
N Mean Std. Deviation
Easly admited borrowers usually default 57 2.1579 .64889
KYC policy of the Bank lead to high loan quality 57 1.7544 .50993
Poor credit analysis and risk assessmet lead to loan

57 1.3860 .49115
default
Project appraisal and selection officers and mgrs are

57 1.9825 .51725
qualified and skilled enough
Valid N (listwise) 57
Mean & std deviation of credit risk assessment

1.8252 .56680
factor
When the likert scale measurement was designed the highest point was allocated to the negative
response, that is 5 for „strongly disagree‟ and the lowest point was allocated for the positive
response, which is 1 for „strongly agree‟ and similar allocation given for the middle values
accordingly. Therefore, mean and standard deviation values are determined accordingly. That is
to say the magnitude of positive response will have a lower mean and standard deviation as
compared to the magnitude of negative response. Therefore, the factor with lower mean and
standard deviation will have a higher impact on the occurrence and rise of NPLs and the factor
with the higher mean and standard deviation will have a lower impact on the occurrence and rise
of NPLs.
In the table 4.5.4.1 above the average mean and standard deviation of the factor „poor credit risk
assessment is 1.8252 and .56680, respectively. The importance and position of the factor is
shown below in comparison with other factors.
48
4.5.5. The effect of Poor Credit monitoring factor on NPL
Table4.5.5. Poor Credit monitoring

Strict monitoring ensures loan performance Strongly Agree 16 28.1%
Agree 39 68.4%
Neutral 2 3.5%
Disagree 0 0.0%
Strongly Agree 0 0.0%
Poorly assessed and advanced loans may Strongly Agree 0 0.0%

perform well
Agree 2 3.5%
Neutral 5 8.8%
Disagree 40 70.2%
Strongly
10 17.5%
Disagree
Loan follow up is directly related to Strongly Agree 11 19.3%

occurence of NPLs
Agree 34 59.6%
Neutral 12 21.1%
Disagree 0 0.0%
Strongly
0 0.0%
Disagree
Banks with higher budget for loan Strongly Agree 0 0.0%

monitoring have lower NPLs
Agree 44 77.2%
Neutral 13 22.8%
Disagree 0 0.0%
Strongle
0 0.0%
Disagree
49
With respect to the effect of sub question „Strict monitoring ensures loan performance‟, about
96% of the respondents shown their agreement by specifically selecting „strongly agree‟ (28%),
and selecting “agree” (68%), respectively. For sub question „Poorly assessed and advanced loans
may perform well‟ about 88% of the respondents shown their „disagreement‟ by selecting
„disagree‟ (70.5%) and „strongly disagree‟ (17.2%), respectively. For the sub question „Loan
follow up is directly related to occurrence of NPLs‟ except 21% those shown their stand as
„neutral” all the rest (i.e.,78% of the respondents) have shown their agreement. In the case of
sub question „Banks with higher budget for loan monitoring have lower NPLs‟ 77% of the
respondents have selected “agree” and 23% of them selected „neutral‟. In average 84.7% of the
respondents have shown their agreement. From the respondents view we can conclude that „Poor
credit monitoring‟ factor has a direct impact on the occurrence and rise of NPLs.
Table 4.5.5.1. Descriptive Statistics on Poor Credit monitoring factor
Strict monitoring ensures loan performance 57 1.7544 .50993
Poorly assessed and advanced loans may perform well 57 4.0175 .64063
Loan follow up is directly related to occurence of NPLs 57 2.0175 .64063
Banks with higher budget for loan monitoring have lower NPLs 57 2.2281 .42332
Average Mean and Standard Deviation

2.5044
.55363
While making analysis on the package of Descriptive statistics of „Poor credit monitoring‟ factor,
the average mean and standard deviation calculated and scored the values of 2.5044, and
.55363, respectively. The importance and position of the factor is shown in comparison with
other factors at appropriate summary column.
50
4.5.6. The effect of collateral on NPLs

Table 4.5.6. Collateral
Collateralized loans perform well Strongly Agree 8 14.0%
Agree 33 57.9%
Neutral 14 24.6%
Disagree 2 3.5%
Strongly
0 0.0%
Disagree
Collateralized loans help protect loan default Strongly Agree 18 31.6%
Agree 39 68.4%
Neutral 0 0.0%
Disagree 0 0.0%
Strongly
0 0.0%
Disagree
Most of the time non collateralized loans are defaulted Strongly Agree 0 0.0%
Agree 42 73.7%
Neutral 11 19.3%
Disagree 4 7.0%
Strongly
0 0.0%
Disagree
Under the effect of collateral factor, three different sub questions have been entertained. With
respect to the sub question, „Collateralized loans perform well‟ about 72% of respondents have
shown their agreement with the important of the statement and about 25% of the respondents
took a neutral position. In the case the sub question „Collateralized loans help protect loan
default‟ almost all of the respondents provided their full (100%) support. For sub statement,
„Most of the time non collateralized loans are defaulted‟ about 74% of the respondents have
51
shown their agreement by choosing “agree” and about 19.3% of them took the position of
„Neutral‟. In conclusion it emphasizes that the importance of collateral has a positive impact on
the occurrence and rise of NPLs.
Table 4.5.6.1.Descriptive Statistics on Collateral factor
Collateralized loans perform well 57 2.1754 .71020
Collateralized loans help protect loan default 57 1.6842 .46896
Most of the time non collateralized loans are defaulted 57 2.3333 .60749
Average Mean and Standard Deviation 2.0643 0.59555
In the light of Descriptive statistics on Collateral, the average mean and standard deviation is
calculated to have the value of 2.0643 and 0.59555, respectively. The importance and position of
the factor however, is shown in comparison with other factors at appropriate summary column.
4.5.7. The effect of Highly levered /Excessive lending factor on NPL
Table 4.5.7. Highly levered /Excessive lending factor

Loan provided to highly levered firm(borrower) Strongly Agree 44 77.2%

usually default
Agree 13 22.8%
Neutral 0 0.0%
Disagree 0 0.0%
Loan provided to highly levered firm(borrower) strongly Agree 24 42.1%

have a direct relation to NPL
Agree 33 57.9%
52
Neutral 0 0.0%
Disagree 0 0.0%
Highly levered firms(borrowers) fail to honor Strongly Agree 46 80.7%

their repayment contractual agreement
Agree 11 19.3%
Neutral 0 0.0%
Disagree 0 0.0%
Under Highly levered /excessive borrowing factor three relevant sub statements have been
presented for respondents‟ option and the following responses have been given. With regard to
the sub statements „Loan provided to highly levered firm (borrower) usually default‟, „Loan
provided to highly levered firm(borrower) have a direct relation to NPL‟, and „Highly levered
firms(borrowers) fail to honor their repayment contractual agreement‟ all of the respondents
have shown their 100% agreement that the statements have a direct impact on the occurrence and
rise of NPLs.
Table 4.5.7.1Descriptive Statistics on Highly levered /Excessive lending factor
Std.
N Mean Deviation
Loan provided to highly levered firm(borrower) usually default 57 1.2281 .42332
Loan provided to highly levered firm(borrower) have a direct relation to

57 1.5789 .49812
NPL
Highly levered firms(borrowers) fail to honor their repayment

57 1.1930 .39815
contractual agreement
Average Mean and Standard Deviation

.43986
1.3333
53
As presented in the descriptive statistics table above, the average mean and standard deviation of
highly levered/excessive lending factor/cause for NPLs is 1.3333 and .43986, respectively. The
importance and position of the factor however, is shown in comparison with other factors at its
appropriate summary column.
4.5.8. The effect of Loan Divert ion factor on NPL

Table 4.5.8. .Loan Divert ion factor
Loan divert ion is the major cause for the occurrence of NPLs Strongly agree 43 75.4%
Agree 14 24.6%
Neutral 0 0.0%
Disagree 0 0.0%
qLoan divert ion is mostly related to NPLs Strongly Agree 46 80.7%
Agree 11 19.3%
Neutral 0 0.0%
Disagree 0 0.0%
In the case of Loan Divert ion`, the respondents have shown their 100% agreement with the two
sub statements; „Loan divert ion is the major cause for the occurrence of NPLs‟ and „Loan
divert ion‟ is mostly related to NPLs‟. For each sub statements, 75% and 80.7% of the
respondents have selected “strongly agree‟ and 25% and 19.3%, of them have selected “agree”,
respectively. Therefore, the researcher came to conclude that the factor of Loan Divert ion has a
real „cause and effect‟ relationship with the occurrence and NPLs.
54
4.5.9. The effect of Borrowers Orientation on NPL

Table 4.5.9. Borrowers Orientation/Culture factor
Borrowers orientation is related to loan performance Strongly Agree 22 38.6%
Agree 35 61.4%
Neutral 0 0.0%
Disagree 0 0.0%
Societies cultural development leads to good loan Strongly Agree 50 87.7%

performance
Agree 7 12.3%
Neutral 0 0.0%
Disagree 0 0.0%
Loans with big interest rate tend to NPL Strongly Agree 0 0.0%
Agree 32 56.1%
Neutral 25 43.9%
Disagree 0 0.0%
Loan price affects loan performance Strongly Agree 0 0.0%
Agree 24 42.1%
Neutral 18 31.6%
Disagree 15 26.3%
Borrowers default because they don't understand credit Strongly Agree 18 31.6%
terms well
Agree 39 68.4%
Neutral 0 0.0%
Disagree 0 0.0%
Poorly negotiated credit terms lead to NPL Strongly Agree 43 75.4%
55
Agree 14 24.6%
Neutral 0 0.0%
Disagree 0 0.0%
The respondents have shown a 100% agreement with four of sub statements, „Borrowers
orientation is related to loan performance‟, „Societies cultural development leads to good loan
performance‟, „ Borrowers default because they don't understand credit terms well‟, and „
Poorly negotiated credit terms lead to NPL‟ by selecting “strongly agree‟ and „agree‟.
However, for the sub statements „Loans with big interest rate tend to NPL‟, and „Loan price
affects loan performance, only 56% and 42% of the respondents have shown their agreement,
respectively, and 44% and 32% of them selected „neutral‟ for the two statements, respectively.
and 26% „disagreement, for the second statement. Therefore, it is concluded that „Borrowers
Orientation/Culture‟ factor has a direct influence on the occurrence and rise of NPLs in private
banks.
Table 4.5.9.1Descriptive Statistics Borrowers Orientation/Culture factor
Borrowers orientation is related to loan performance 57 1.6140 .49115
Sociyties cultural development leads to good loan performance 57 1.1228 .33113
Loans with big interest rate tend to NPL 57 2.4386 .50063
Loan price affects loan performance 57 2.8421 .81918
Borrowers default because they don't understand credit terms well 57 1.6842 .46896
Poorly negotiated credit terms lead to NPL 57 1.2456 .43428
Average Mean and Standard Deviation 1.9912 .50755
56
The descriptive statistics of the average mean and standard deviation of Borrowers orientation is
1.9912 and 0.50755, respectively. The importance and position of this factor is however, shown
in comparison with other factors at its appropriate summary column.
4.5.10. The effect of Credit size factor on NPL

Table 4.5.10. Credit size factor
Aggressive lending leads to large NPL strongly Agree 29 50.9%
Agree 28 49.1%
Neutral 0 0.0%
Disagree 0 0.0%
Bank's great risk appetite cause to NPL Strongly Agree 3 5.3%
Agree 39 68.4%
Neutral 15 26.3%
Disagree 0 0.0%
strongly Disagree 0 0.0%
Compromised integrity in lending leads to Strongly Agree 49 86.0%

loan default
Agree 8 14.0%
Neutral 0 0.0%
Disagree 0 0.0%
Having large number of borrowers cause loan strongly Agree 2 3.5%

default
Agree 8 14.0%
Neutral 2 3.5%
Disagree 31 54.4%
Loan default rate is directly related to bank's Strongly Agree 0 0.0%

size
Agree 0 0.0%
57
As per the response summarized in „Table 4.5.10‟ above all of the sub statements under „credit
Neutral 3 5.3%
Size‟ factor have got the respondents agreement, but with varied magnitude. In this regard sub
Disagree 40 70.2%
statements „Aggressive lending leads to large NPL‟ and „Compromised integrity in lending leads to
loan default‟ have got 100% of respondents agreement but sub statement „Bank's great risk appetite
Loanto
cause default
NPL‟is not
gotrelated with bank's
only 74% Stronglyagreement
of the respondents Agree and 26% took the21
position of 36.8%
„Neutral‟.
ownership type (private/state owned)
Hence, we can conclude that „Credit size‟ Agree
factor has a direct influence on the occurrence
32 and rise of
56.1%
NPLs in private banks. Neutral 4 7.0%
Disagree 0 0.0%
Table 4.5.11 Correlations of the seven independent variables
Poor
Credit_
Borrowe
Risk P oor Credit_ rs'
Assessme Highly Loan orientati
nt Monitoring Collateral levered Diversion on Credit Size
Credit_Ri Pearson
1 -.035 .417** .062 .000 .430** -.099
sk Correlation
Sig. (2-tailed) .794 .001 .645 .998 .001 .465
N 57 57 57 57 57 57 57
Credit_M Pearson
-.035 1 -.194 -.158 .225 -.043 -.053
onitoring Correlation
Sig. (2-tailed) .794 .148 .240 .092 .752 .696
N 57 57 57 57 57 57 57
Collateral Pearson
.417** -.194 1 -.015 .340** .192 -.099
Correlation
Sig. (2-tailed) .001 .148 .909 .010 .153 .462
N 57 57 57 57 57 57 57
Highly Pearson
.062 -.158 -.015 1 -.141 -.025 -.183
levered Correlation
Sig. (2-tailed) .645 .240 .909 .294 .853 .174
58
N 57 57 57 57 57 57 57
Loan Pearson
.000 .225 .340** -.141 1 -.080 .206
Diversion Correlation
Sig. (2-tailed) .998 .092 .010 .294 .556 .124
N 57 57 57 57 57 57 57
Borrowers Pearson
.430** -.043 .192 -.025 -.080 1 -.063
' Correlation
orientatio
n Sig. (2-tailed) .001 .752 .153 .853 .556 .642
N 57 57 57 57 57 57 57
CSize Pearson
-.099 -.053 -.099 -.183 .206 -.063 1
Correlation
Sig. (2-tailed) .465 .696 .462 .174 .124 .642
N 57 57 57 57 57 57 57
**. Correlation is significant at the 0.01 level (2-tailed).
4.5.11. Correlations of the seven independent variables
Correlations of the seven independent variables have been made and negative values indicated
the non existence of relation (that means negative impact could be shown on the variable with
the negative value with the change in the other variable) and the positive values indicated direct
relation of the variables against each other.
For example in Pearson correlation model credit risk assessment is negatively correlated with
Credit monitoring with a value of -.035 (which implies that good risk assessment leave no room
for detection of discrepancies while conducting credit monitoring task) and credit size with a
value of -.099 and have no correlation with loan divert ion due to .000 values. Conversely,
however, poor credit risk assessment factor is positively correlated with Borrowers orientation
and Collateral with higher magnitude and „highly levered‟ with lower intensity.
59
Table 4.5.12. Summary of the importance and rank of the factors
Independent Variables Average Mean Average Standard Rank

Deviation
Poor Credit Risk Assessment 1.8252 0.56680 3
Poor Credit Monitoring 2.5044 0.55363 6

Collateral 2.0643 0.59555 5
Highly levered/Excessive 1.3333 0.43986 2
lending
Loan Divert ion 1.3014 0.43314 1
Borrowers Orientation 1.9912 0.50755 4
Credit Size 2.6302 0.59551 7
As a result of the design of likert scale measurement the highest point was allocated to the
negative response, that is 5 for „strongly disagree‟ and the lowest point was allocated for the
positive response, which is 1 for „strongly agree‟. Similarly, the middle values 2.3 and 4
allocated for „agree‟, „neutral‟ and „disagree‟, respectively, were done accordingly. Therefore,
mean and standard deviation values are determined accordingly. That is to say the magnitude of
positive response will have a lower mean and standard deviation as compared to the magnitude
of negative response. Therefore, the factor with lower mean and standard deviation will have a
higher impact on the occurrence and rise of NPLs and the factor with the higher mean and
standard deviation will have a lower impact on the occurrence and rise of NPLs.
Therefore, as indicated in the table, the factors; „Loan Divert ion‟ and Highly
levered/Excessive lending factors, which scored the lowest Means of 1.3014 and 1.3333 and
Standard Deviations of 0.43314 and 0.43986 have got the 1st and 2nd ranks, respectively, in
determining the occurrence and rise of NPLs in Ethiopian private Banks. By the same fashion all
other factors such as „Poor Credit Risk Assessment‟ took the 3rd position with mean and
standard deviation values of 1.8252, and 0.5668, „Borrowers Orientation’ the 4th with mean
and st. dev. of 1.9912, and 0.50755, „Collateral’ took 5th with mean and st.dev. values of
60
2.0643 and 0.59555, „Poor monitoring’ 6th and ‘Credit Size, took the last or the 7th position,
respectively
4.6. Summary of the chapter
In this chapter the panel data set of secondary sources have been collected from twelve private
Banks, but with only three years of the latest NPLs data. In spite of its scarcity, evaluation of
NPLs records have been made and determined that NPLs position of private banks is in a good
condition as compared to the requirement set by NBE.
By the same token, the primary data collected through questionnaire and interview were
presented and explained. The findings were also analyzed on the basis of the research questions
posed at the outset. In this regard the impact of independent variables on the occurrence and rise
of NPLs have been well assessed and presented in their rank order. In other words, the cause and
effect relationship of the independent variables with that of the dependent variable has also been
explained.
The importance of the two critically investigated variables, namely Loan Divert ion and Highly
Levered/Excessive Lending factors have been well addressed. In this regard, the findings of the
thesis revealed that both factors have a 1st and 2nd rank impact on the occurrence and rise of
NPLs in private Banks of Ethiopia as compared to other factors evaluated in this research paper.
61
Chapter Five
5. Conclusion and Recommendations
5.1. Conclusion
In conclusion the researcher has tried to discuss about the findings of the analysis that was
conducted using the SPSS software. Descriptive approach and somewhat correlation analysis had
been shown during the analysis. The descriptive approach displayed direct results while the
correlation displayed the relationship between the seven independent variables which were
considered to contribute to dependent variable, the occurrence and rise of Non-performing Loans
(NPLs). Among the seven independent factors the two factors that the researcher focused on
more namely; Loan divert ion and providing loan to Highly levered borrowers have been finally
concluded to have been the major contributing factors for the deterioration of loan asset in
Ethiopian Private banks with specific reference to BOA.
The researcher had also discussed about the implication and limitations of this study. Lastly, the
researcher had provided some recommendations for the oncoming researchers who may work a
research on similar topics.
5.2. Recommendations
The researcher believes that many works are still required on the investigation of factors
affecting the deterioration of loan asset or non-performing loan and their relationship with the
commercial banks. The above information has indicated that the major bank specific
factors/causes selected to see their impact on the occurrence of NPLs at various extents.
Among the captioned bank specific factors, the researcher emphasized more on the independent
variables namely; Loan Divertion and Highly levered/excessive lending factors, which have been
finally concluded to have been the major contributing factors for the occurrence and rise of NPLs
in Ethiopian Private Banks with specific reference to BOA.
Therefore, the researcher recommends that:
1. Private banks need to focus on all aspects of impacts of the above mentioned independent
variables in order to mitigate solution they may pose on the occurrence of NPLs,
62
2. Future researchers who may have an interest to conduct a research on similar topic can
use this research paper as an input by applying an increased size of the samples through
wider perspectives of research methods in order to come up with a more reliable and
comprehensive research outcome.
63
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66
(Appendix 1)
QUESTIONNAIRE
My name is Dagne Kitaba and I am currently undertaking a research of Master‟s Degree in

General Management (GMB) at the Saint Mary‟s University. The research study aims to assess
‘‘The status of Non-performing Loans (NPLs) and Evaluation of their causes in Ethiopian
Private Banks with Specific Reference to Bank of Abyssinia (BOA)’’. To this effect, the
study intends to gather information from selected credit related practitioners (i.e., Directors,
credit managers, Relation Managers (RMs), monitoring officers, risk and compliance officers,
Managers of Big braches and etc) through a self administered questionnaire. The participation is
fully voluntary and responses will be handled confidentially. The results will also be reported
without compromising the anonymity of respondents.
The questionnaire takes about 15 minutes to complete. I would appreciate your assistance in
completing the enclosed questionnaire by ticking and recording the appropriate answers.
In case you have any questions please call:
- Mobile Phone 0912-838350 or
- email [email protected].
Thank you in advance

QUESTIONNAIRE
(Please tick appropriate boxes)

SECTION ONE – BACKGROUND INFORMATION
1. Your current position in the Bank.
1. Loan Officer 4. Recovery/ monitoring officer
2. Credit analyst 5.Credit Director
3. Relationship manager 6.Vice president
7. Other, please specify _____________________
2. Your work experience in the banking industry
1. Less than 1 year 4. 11-15 years
2. 1-5 years 5.Above 15 years
3. 6-10 years
67
3. Your experience in bank credit processes
1. Less than one year 4.11-15 years
2. 1-5 years 5. Above 15 years
3. 6-10 years
4. Ownership of the Bank you work for
1. Private 2. State owned
5. Determinants of Non-performing Loans are obvious.
1. Agree 2. Neutral 3. Disagree
SECTION TWO – QUESTIONS ON THE DETERMINANTS OF NON-PERFORMING

LOANS.
6. What bank specific factors do you think are causing the occurrence of Non-
performing Loans in Ethiopian Private Banks?_________________________
_______________________________________________________________________
7. Please rank the factors that cause occurrence of Non-performing Loans in
Ethiopian private banks_______________________________________________
N.B Rank the factors in order of their importance in contributing to the occurrence of
Non-performing Loans from 1-10
Rank
1=highest ……10=lowest
1. High leverage (excessive lending) -----------------------------------------
2. Loan diversion (use of the loan for other purpose than agreed upon)
3. Rapid Loan growth by banks-----------------------------------------------
4. High interest rate--------------------------------------------------------------
5. Lenient credit terms----------------------------------------------------------
68
6. Credit culture / Orientation-------------------------------------------------
7. Size of the Bank--------------------------------------------------------------
8. Poor monitoring/follow up--------------------------------------------------
9. Poor risk assessment---------------------------------------------------------
10. Others, Please specify________________________________
______________________________________
8. Please specify your degree of agreement or disagreement to the statements

pertaining to credit risk assessment and the occurrence of NPL
Strongly Agree Neutral Disagree Strongly
Agree (2) (3) (4) Disagree(5)
(1)
1 Easily admitted borrowers

usually default
2 Know Your Customer (KYC)
policy of the Bank lead to high
loans quality
3 Poor credit analysis and risk

assessment would lead to loan
default
4 Project appraisal and selection

officers and managers are qualified
and skilled enough
9. Please indicate your degree of agreement or disagreement to the statements

pertaining to credit monitoring and the occurrence of NPL

(1)
1 Strict monitoring ensures

loan performance
69
2 Poorly assessed and advanced

loans may perform well if
properly monitored
3 Loan follow up is directly

related to occurrence of
Non-performing Loans
4 Banks with higher budget for

loan monitoring have lower
Non-performing Loans

pertaining to Collateral and the occurrence of NPL
(1)
1 Collateralized loans
perform well
2 Collateralizing loans
help protect loan default
3 Most of the time non

collateralized loans are
defaulted

pertaining to loan granted to highly levered firm and the occurrence of NPL
Agree (1) (2) (3) (4) Disagree(5)
1 Loan provided to highly levered

firm (borrower) usually default
2 Loan provided to highly levered
firm have a direct relation to
NPLs
3 Highly levered borrowers
usually fail to honor their
repayment contractual
agreement
70

pertaining to loan divert ion and the occurrence of NPL

Agree (1) (2) (3) (4) Disagree(5)
1 Loan divert ion is the major

cause for the occurrence of NPL
2 Loan divert ion is mostly related
to NPL

pertaining to borrower’s orientation and the occurrence of NPL

(1)
1 Borrower‟s orientation/culture is
related to loan performance
2 Society‟s cultural development

leads to good loan performance
3 Loans with big interest rate

tend to turn to NPL
4 Loan price affects loan

performance
5 Borrowers default because they
don‟t understand credit terms
well
6 Poorly negotiated credit terms

lead to loan nonperformance

pertaining to Credit size and the occurrence of NPL
71
Agree (1) (2) (3) (4) Disagree(5)
1 Aggressive lending leads to

large NPL volume/ratio
2 Bank‟s great risk appetite
cause for NPL
3 Compromised integrity in
lending leads to loan default
4 Having large number of

borrowers causes loan default
5 Loans default rate is

directly related to banks‟ size
6 Loan default is not related with

banks ownership type
(private/state owned)
15. If you have further comments on the bank specific factors affecting
Non-performing Loans of Ethiopian private Banks please use the space below-
___________________________________________________________________
End of the questionnaire
Thank you for your participation
72
(Appendix 2)
Instrument for In-depth interview

1. Summary of the respondent profile (Current status, banking experience, experience on credit, and
the relevant questions)
2. Views of the respondents on the factors that determine the deterioration of loan asset quality in the
Ethiopian private banks in general and BOA in particular.
3. Views of respondents on which factors answered in Q2 stand at the top and rating of the factors
thereof in relation to the other.
4. Opinion of respondents on the impact of the Ethiopian private Banking context that might have
any bearing on the occurrence of loan default.
5. Recommendation/ if any for mitigating occurrence of Non-performing Loans proposed by the

respondents.
73
(Appendix 3) Data provided from Surveyed Private Banks.
Bank of Abyssinia (BOA) ‘000

BOA 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Asset 5,476,626 6,279,540 7,277,567 8,239,514 10,160,114 11,276,391 13,667,559 16,828,069 25,324,804 31,983,036
Total Capital 519,230 585,492 660,759 906,594 1,107,635 1,528,968 1,810,547 2,124,426 2,904,814 4,245,359
Total Dep. 4,494,186 5,138,847 6,075,259 6,771,246 8,496,148 9,096,477 11,118,168 13,634,966 20,700,812 25,790,000
Total Loon 2,708,965 3,153,244 3,315,688 3,897,407 4,702,074 5,153,461 5,995,557 8,121,370 14,105,407 17,990,990
DNA DNA DNA DNA DNA DNA DNA
NPL 170,301 195,151 234,578
DNA DNA DNA DNA DNA DNA DNA
NPL Ratio 0.0210 0.0138 0.0130
‘
Source: Own computation and surveyed private Banks
DNA= Data not available
Awash Bank ‘000

AWASH 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Asset DNA 25,210,501 55,268,107

9,022,989 11,089,441 13,125,217 17,783,927 22,106,346 31,147,685 41,974,865
Total DNA 2,596,943 3,185,025 6,495,714
Capital 959,349 1,336,497 1,650,631 2,066,219 3,934,354 4,809,338
Total Dep. DNA 18,520,419 43,451,378
6,105,940 7,743,781 9,204,358 12,545,209 15,040,715 22,832,029 30,590,900
Total Loon DNA 9,176,360 12,482,041 31,304,221
3,145,686 3,986,465 5,504,610 7,709,998 15,450,777 22,576,339
NPL DNA DNA DNA DNA DNA DNA DNA 582,880.00
304,694.00 437,163.00
NPL Ratio DNA DNA DNA DNA DNA DNA DNA
1.86 1.94 1.97
DASHEN BANK ‘000

DASH 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EN
Total 28,576,434
Asset 9,732,583 12,353,386 14,659,795 17,520,042 19,747,175 21,962,202 24,763,886 34,624,602 45,425,378
74
Total
Capita 908,695 1,123,348 1,396,402 1,827,894 2,045,699 2,597,625 2,923,894 3,357,826 3,992,984 5,866,611
l
Total
Dep. 7,925,210 10,144,549 11,841,239 14,065,600 15,851,264 17,681,343 19,814,107 22,758,501 27,782,522 35,986,800
.00 .00 .00 .00 .00 .00 .70 .00 .00 .00
Total
Loon 7,925,210 10,144,549 11,841,239 8,123,813 8,862,316 9,607,825 11,526,995 12,695,122 18,082,889 23,285,591
NPL DNA DNA DNA DNA DNA DNA DNA
Ratio 3.42 3.46 3.42
Total DNA DNA DNA DNA DNA DNA DNA
NPL 795,657.00 625,326.00 795,657.00
UNITED BANK ‘000

UNITE 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
D
Total
Asset 4,652,443 5,896,233 7,725,441 8,786,860 9,985,997 11,876,36 14,360,872 17,269,873 21,902,918 28,030,918
9
Total 2,072,489
Capital 519,975 637,554 901,365 1,101,716 1,201,148 1,575,272 1,686,240 2,515,640 2,953,813
Total
Dep. 3,381,837 4,424,517 5,786,707 6,401,588 7,698,860 8,909,069 11,070,779 13,037,642 16,505,125 23,079,045
.00 .00 .00 .00 .00 .00 .90 .00 .00 .00
Total
Loon 2,152,976 2,613,609 3,276,959 4,085,376 4,710,762 5,069,624 6,860,084 8,534,359 11,996,311 15,065,836
156,919.0 91,768.00 308,410.0
Ratio 1.84 0.76 2.05
WEGAGEN BANK ‘000

WEGAG 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EN
Total
Asset 5,118,311 5,741,937 8,060,937 8,347,155 10,393,80 11,528,77 13,711,36 16,189,764 20,949,168 27,390,906
3 0 5
Total
Capital 836,415 1,051,726 1,337,335 1,604,133 1,830,425 2,144,215 2,414,373 2,805,774 3,355,787 3,826,506
Total
Dep. 6,912,518 7,527,983 5,733,716 5,428,297 7,148,159 8,026,270 9,870,945 11,078,547 14,020,235 20,506,129
.00 .00 .00 .00 .00 .00 .00 .00 .00 .00
Total
Loon 2,112,381 2,473,872 2,910,049 3,565,675 4,690,142 4,604,416 4,518,690 7,630,323 10,377,220 15,047,640
129,041.00 131,797.00 1,954,255.
00
Ratio 1.69 1.27 12.99
75
NIB INTERNATIONAL BANK(NIB) ‘000

NIB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Asset
4,806,50 5,970,51 7,111,80 8,275,69 9,144,54 10,747,28 13,256,12 15,830,32 21,019,70 26,688,92
7 1 8 5 4 3 4 2 9 2
Total
Capital 728,824 916,508 1,170,80 1,527,94 1,665,92 1,964,357 2,177,304 2,517,956 2,954,062 3,380,401
0 6 9
Total Dep.
3,296,39 4,127,18 5,157,40 5,838,12 6,655,21 7,923,293 9,774,115 12,423,02 16,416,43 21,619,23
0 8 1 6 3 3 7 6
Total Loon
2,220,28 2,546,13 2,766,52 3,708,90 4,542,99 5,523,500 6,999,192 7,647,138 10,888,41 13,703,96
9 6 2 0 2 0 5
390,466 359,443 655,720
NPL Ratio DNA DNA DNA DNA DNA DNA DNA
0.0511 0.0330 0.0478
COOPERATIVE BANK OF OROMIA(CBO) ‘000

CBO 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total
Asset 1,022,88 1,768,615 2,500,359 3,670,726 6,537,470 7,350,372 11,462,06 10,687,34 17,724,241 29,888,034
2 7 8
Total
Capit 156,410 189,003 245,837 417,214 695,991 1,090,376 1,410,911 1,220,947 1,517,050. 1,517,050.
al 11 11
Total
Dep. 788,680. 1,371,820 1,980,420 1,471,164 4,465,040 5,450,097 7,367,800 8,488,330 14,276,793 23,322,429
00 .00 .00 .00 .00 .00 .00 .00 .93 .54
Total
Loon 595,993 721,773 801,897 1,383,515 2,116,060 3,712,476 6,158,855 9,929,793 15,185,482
1,278,424 575,228 534,203
Ratio 0.2076 0.0579 0.0352
76
LION BANK ‘000

LION 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total 8,119,232
Asset 952,468 1,363,612 1,808,057 2,463,032 2,942,433 3,613,339 5,859,362 10,975,92 14,319,598
9
Total 1,069,860
Capit 191,763 241,799 352,921 441,726 541,945 627,820 822,122 1,448,884 1,808,872
al
Total
Dep. 703,600. 1,017,580 1,297,373 1,736,656 2,105,863 2,686,984 4,457,396 6,333,564 8,774,856 11,639,588
00 .00 .00 .00 .00 .00 .60 .24 .28 .00
Total
Loon 470,142 583,993 676,332 970,663 1,318,065 1,562,028 2,878,316 4,389,702 5,598,265 7,561,254
98,258 138,700 172,841
Ratio 0.0224 0.0224 0.0224
BUNNA BANK ‘000

BUNN 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
A
Total
Asset 168,09 480,117 781,366 1,365,03 2,128,454 3,011,946 4,262,163 6,821,000 9,820,014 13,021,152
1 2
Total
Capita 158,06 169,103 232,433 287,012 372,503 516,764 677,719 960,548 1,352,977 1,983,419
l 5
Total
Dep. 239,262. 491,316. 903,306. 1,547,609. 2,151,591. 2,991,287. 5,384,603. 6,864,812. 9,153,260.
00 00 00 00 00 74 76 00 00
Total
Loon 192,257 366,262 651,941 949,429 1,359,690 2,445,968 3,694,816 5,249,627 6,942,320
121,485 148,444 268,269
Ratio 0.0329 0.0283 0.0386
OROMIA INTERNATIONAL BANK(OIB) ‘000

OIB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total 11,281,58
Asset 326,358 1,118,57 1,961,839 2,787,394 3,911,231 6,026,272 9,534,850 9 16,292,907 23,796,732
3
Total 1,317,819
Capit 107,282 212,010 296,017 437,680 547,603 748,473 992,923 1,665,659 1,665,659
al
Total
Dep. 189,497. 820,935. 1,526,318 2,117,297 3,050,440 4,829,026 7,290,291 9,347,000 13,414,120 16,913,738
77
00 00 .84 .00 .00 .00 .90 .00 .00 .00

Total
Loon 113,265 368,987 654,701 1,019,596 1,621,228 2,551,638 4,767,175 5,258,340 7,175,542 10,060,489
164,104 244,850 389,402
Ratio 0.0312 0.0341 0.0387
ZEMEN BANK ‘000

ZEME 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
N
Total 7,374,132
Asset 462,599 1,055,62 1,613,912 2,394,242 3,248,479 3,924,769 4,874,341 9,669,056 12,438,906
3
Total 1,002,021
Capit 90,516 158,594 240,709 280,600 493,486 657,012 764,857 1,314,565 1,696,783
al
Total
Dep. 277,847. 688,025. 1,162,558. 1,792,882. 2,505,525. 5,933,937. 3,819,454. 5,486,917. 7,323,281. 10,217,516
00 00 00 00 00 00 30 40 33 .00
Total
Loon 188,733 383,916 645,225 1,012,690 1,369,655 1,429,960 2,282,968 3,403,837 4,160,128 5,217,523
205,679 823,259 285,831
Ratio 0.0604 0.1979 0.0548
BIRIHAN BANK ‘000

BIRHAN 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total DNA DNA

Asset 379,520 913,783 1,285,037 2,197,315 2,814,261 4,171,944 7,196,303 10,488,873
Total DNA DNA
Capital 102,359 149,942 236,145 381,548 554,442 726,802 1,060,237 1,885,056
Total DNA DNA
Dep. 153,194 331,818 499,551 978,902 1,184,696 1,901,834 3,757,388 5,331,111
Total DNA DNA
Loon 153,194 331,818 499,551 978,902 1,184,696 1,901,834 3,757,388 5,331,111
NPL DNA DNA DNA DNA DNA DNA DNA DNA DNA DNA
NPL DNA DNA DNA DNA DNA DNA DNA DNA DNA DNA
Ratio

78
(Appendix 4)
NPLs and NPLs Ratio Data of the 12 Private Banks
The following table represents the last three years Non-performing Loans (NPLs)
and NPLs ratio data of the captioned twelve Banks
Banks Type of Data 2016 2017 2018

BOA NPLs 170,301 195,151 234,578
NPLs ratio 2.10% 1.38% 1.30%
Awash NPLs 304,694.00 437,163.00 582,880.00
NPLs ratio 1.86 % 1.94 % 1.97 %
Dashen NPLs 795,657.00 625,326.00 795,657.00
NPLs ratio 3.42 % 3.46 % 3.42 %
United Bank NPLs 156,919.0 91,768.00 308,410.0
NPLs ratio 1.84 % 0.76 % 2.05%
Wegagen NPLs 129,041.00 131,797.00 1,954,255.00
NPLs ratio 1.69 % 1.27 % 12.99 %
NIB NPLs 390,466 359,443 655,720
NPLs ratio 5.11 % 3.30 % 4.78 %
CBO NPLs 1,278,424 575,228 534,203
NPLs ratio 2.07% 5.79% 3.52%
Lion NPLs 98,258 138,700 172,841
NPLs ratio 2.24% 2.24% 2.24%
Bunna NPLs 121,485 148,444 268,269
NPLs ratio 3.29% 2.83% 3.86%
OIB NPLs 164,104 244,850 389,402
NPLs ratio 3.12% 3.41% 3.87%
Zemen NPLs 205,679 823,259 285,831
NPLs ratio 6.04% 19.79% 5.48%
Birhan NPLs DNA DNA DNA
NPLs ratio DNA DNA DNA
79

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Research Report of Dagne K.

St. Mary’s University

A RESEARCH PROJECT ON ASSESSMENT OF NPLS

by: Dagne Kitaba

specific reference to Bank of Abyssinia (BOA)” is submitted by me in partial fulfillment of the

requirement of the degree of Masters of Business Administration at St, Mary‟s University,

Place: Addis Abeba Signature: ----------------

Date: June, 2019 Name: Dagne Kitaba

ID. No. SGS/0044/2009 B

Place: Addis Abeba Signature: ---------------------------------

A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY SCHOOL OF

APPROVED BY BOARD OF EXAMINERS

Central Statistical Agency for their cooperation in providing necessary data.

Furthermore, my indebted gratitude expressed to my schoolmates and all members of my family

for their encouragement in completing this research paper.

CHAPTER ONE .............................................................................................................................. 1

1.8Organization of the paper ........................................................................................................... .8

CHAPTER TWO ............................................................................................................................ 10

CHAPTER THREE ......................................................................................................................... 24

3.7 Model Specification .................................................................................................................... 27

CHAPTER FOUR .......................................................................................................................... 30

CHAPTER FIVE ................................................................................................................................52

Appendix 4; NPLs and NPLs Ration of 12 private Banks…………………………………………....69

Table 4.5.11 Correlation………………………………… ………………………........38

ATM=Automated Tellers Machine

BIB=Bunna International Bank

CBB=Construction and Business Bank

CBE= Commercial Bank of Ethiopia

CBK=Central Bank of Kenya

CBO=Cooperative Bank of Oromia

FSI=Financial Soundness Indicator

GDP=Gross Domestic Product

IMF=International Monetary Fund

NBE= National Bank of Ethiopia

NIB=Nib International Bank

OIB=Oromia International Bank

SNA=Statistical National Account

1.1. Background of the study

1.2. Statement of the Problem

1.3. Objectives of the Study

This study is carried out to fulfill the following objectives:

1.3.1. General objective

1.3.2. Specific Objectives

1. To assess the status of NPLs of Ethiopian Private Commercial Banks.

1.4. Research Questions

1.5. Scope of the study

1.6. Significance of the Study

1.7. Limitation of the Study

1.8. Organization of the paper

2.1. Historical Background of Banking In Ethiopia

2.2. Conceptual Framework

2.3. Financial (Loan) Asset

2.5. Loans, and Performing Loans

2.5.1. Non-performing loans

A non-performing loan is a debt on which the borrower is late on making payments or is in

of the bank NPL is dependent on micro-economic factors but influenced by macro-economic

2.6. Loan factors

2.7. Non-performing loans provision