The main objective of this study was to examine the determinants of non-performing loans in the case of the Development Bank of Ethiopia, Bahir Dar District. Descriptive and explanatory research designs were employed. The study uses both a quantitative and qualitative research approach. The study also uses both primary and secondary data sources. The primary source was collected from all 125 employees using questionnaires and interviews conducted with concerned managerial staffs of the district. The secondary source was gathered from DBE manuals, policy and procedure of the bank, NBE directives, bank's T-24 system, loan positions and provisions documents.
The data was analyzed and interpreted by using descriptive and inferential statistics with the help of SPSS version 22.0 and qualitative analysis like interview and document analysis. The correlation between independent variables (bank specific and External factor) and dependent variables (nonperforming loan) were tested by using person correlation and the casual relation was analyzed by using linear multiple regression analysis.
The finding of the study indicate that credit assessment, project monitoring, credit appraisal, bank top management, political and social instability, availability of infrastructure, collateral strength and market factor are significant factors for occurrence of non-performing loans. However, credit term and condition and lending interest rate are insignificant factor for the occurrence of non-performing loans. Finally, the study recommends the district should perform proper selection of customers and make appropriate due diligence based on KYC assessments, proper monitoring and follow up as per the schedule, make accurate credit appraisal, granting loans via strong collateral coverage, sound decision made by top management based on policy and procedure of the bank, improve capacity of credit performer by providing relevant training.
Table of Contents
1. INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.3.1 General objective
1.3.2 Specific objectives
1.4. Significance of the study
1.5. Scope of the Study
1.6. Limitation of the Study
1.7. Organization of the Paper
2. REVIEW OF RELATED LITERATURE
2.1 Introduction
2.2 Theoretical Review Literature
2.3. Basic concept of Nonperforming Loan
2.3.1. Classifications of Loans and advance
2.3.2 Five Cs of Nonperforming/Bad loans
2.3.3 The “Five C’s-the Basic Components of a Credit Analysis:
2.3.4. Determinants of Non-Performing Loan (NPL)
2.4. Empirical studies
2.4.1. Empirical studies in other Countries
2.4.2. Empirical studies in Ethiopia
2.4.3 Present knowledge gap
2.5. Conceptual framework
2.6. Research Hypothesis
3. RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research approach
3.3 Research Design
3.4. Types of data and Source
3.5. Target Population
3.6 Data collection instrument
3.7. Validity and Reliability of Research
3.8 Data analysis Technique
3.9. Ethical Considerations
4. DATA PRESENTATION, ANALYSIS AND DISCUSSION
4.1. Introduction
4.2 Response rate
4.3. Demographic Characteristics of Respondents
4.4. Descriptive Analysis
4.5. Decision rule
4.6. Correlation Analysis
4.7. Multiple Regression Analysis
4.7.1. Regression Model Diagnosis
4.7.2. Test for Multi co Linearity
4.7.5. Regression Analysis of Dependent and Independent Variables
4.7.6. Effects of the Determinant on nonperforming loans
4.8. Qualitative Analysis of Interview
4.9. Nonperforming loan ratio Analysis
5. SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction
5.2. Summary
5.3 Conclusion
5.4 Recommendations
5.5. Recommendation for Further study
Research Objectives and Themes
The primary objective of this research is to identify and examine the determinants of non-performing loans (NPLs) within the Development Bank of Ethiopia, specifically in the Bahir Dar District, by analyzing both bank-specific and external factors that contribute to loan defaults.
- Analysis of bank-specific determinants, including credit assessment processes and project monitoring.
- Investigation of external factors affecting loan repayment, such as political and social instability.
- Assessment of the current trend of NPL ratios within the district over the last five years.
- Evaluation of the impact of credit appraisal and collateral strength on loan quality.
Excerpt from the Thesis
2.3.4.1. Bank Specific Determinants
Apart from macroeconomic variables and borrower’s specific factors there is abundant empirical evidence suggests that several bank specific factors are important factors that determine NPLs. However, the study only considers seven bank specific variables and three external variables owing to data availability. These are credit assessment or due diligence, project monitoring, collateral strength, credit appraisal, interest rate, Credit term and condition and bank top management pressure, market, political and social problem, and availability of infrastructure
Credit Assessment or Due Diligence Assessment: Due Diligence is an examination by investment banks or company’s management about operations, financial condition, competitive position, performance, business objectives and plan, the labor force, supplier, its customers and the sector of its business of their customers or business firms (DBE, 2008).
The Bank accepts applications from both recruited and walk-in customers if they fulfill the Bank’s loan requirements. The Customer Relationship Management Directorates /branches mainly focus on recruiting customers by attracting and persuading potential applicants using appropriate means of communication. This requires the understanding of the strategic and operational plan of the Bank and identifying the sources of such potential customers. It is also important to promote the Bank’s services, offer options of model bankable projects and encourage potential investors to apply for credit. Customer Relationship Management Directorates and/or branches offices should select potential customers applying for project financing based on the eligibility criteria and checklists for customer requirements. Due diligence or Knowing your customer (KYC) assessment will be undertaken by the Bank to identify the integrity or creditworthiness of the borrower as well as the Bankability of the project itself. This is done to protect the Bank from entering into relationships with inappropriate borrowers and to check the borrower’s credit worthiness. This requires knowledge of gathering and evaluating KYC information of the applicant in compliance with the due diligence assessment guidelines and formats of the DBE and the requirements of the NBE directive No SBB/46/2010
Summary of Chapters
CHAPTER ONE: Provides the background of the study, identifies the research problem, and defines the research objectives and scope.
CHAPTER TWO: Reviews theoretical and empirical literature related to non-performing loans and identifies the current research gap.
CHAPTER THREE: Details the research methodology, including the approach, design, and data collection tools used for the study.
CHAPTER FOUR: Presents the primary data, empirical analysis, and discussion of the research findings regarding NPL determinants.
CHAPTER FIVE: Synthesizes the research findings, concludes the study, and offers recommendations based on the analysis.
Key Words
Bank specific factor, External factor, Nonperforming loan, Credit assessment, Project monitoring, Collateral strength, Credit appraisal, Bank top management pressure, Lending interest rate, Financial performance, Loan default, Credit risk, Market stability, Infrastructure, KYC assessment.
Frequently Asked Questions
What is the core focus of this research?
The study investigates the factors that determine the occurrence of non-performing loans (NPLs) at the Development Bank of Ethiopia, specifically within the Bahir Dar District.
What are the primary thematic areas covered?
The research focuses on the impact of bank-specific determinants like credit assessment, project monitoring, and appraisal, as well as external factors such as political instability and infrastructure availability.
What is the main objective of the thesis?
The main objective is to empirically examine the causality between independent variables (internal bank practices and external environmental factors) and the dependent variable (non-performing loans).
Which scientific methods were employed?
The study utilizes a mixed-methods approach, combining quantitative data analysis (SPSS, descriptive/inferential statistics, and multiple regression models) with qualitative insights from interviews conducted with branch and district managers.
What topics are discussed in the main body?
The main body covers the theoretical framework of credit analysis, detailed empirical studies regarding Ethiopian and international banking sectors, and an in-depth analysis of collected survey data.
Which keywords help define the scope of the study?
Key terms include Nonperforming loans, Bank-specific factors, External factors, Credit risk, Credit appraisal, and Financial sector stability.
How is "Non-performing loan" defined by the bank?
Following NBE directives, NPLs are defined based on quantitative criteria, specifically loans for which interest and principal payments are overdue for a stipulated period, rendering them non-recoverable under current contract terms.
What is the significance of the "Bank Top Management Pressure" variable?
The study suggests that unnecessary intervention from top management, which forces credit activities beyond standard policies and procedures, is a significant factor driving the increase in NPLs.
- Arbeit zitieren
- Anonym (Autor:in), 2023, Assessing Non-Performing Loans in the Development Bank of Ethiopia, Bahir Dar District. An Analysis of Determinants Using Quantitative and Qualitative Approaches, München, GRIN Verlag, https://www.grin.com/document/1432182
