Determinants of Default in Project Finance in Development Bank of Ethiopia

Abstract

The study aims to identify the determinant factors affecting project loan default financed by the Development Bank of Ethiopia (DBE), Head Office. In order to realize the objective of the study, the mixed research design was used whereby descriptive, econometrics, and qualitative approaches were blended. Data were collected mainly through primary sources using a questionnaires. Of the 80 borrowers sampled, 40 were non-performing loans. For the analysis of data, descriptive statistics and an econometrics model was used. The results obtained imply that the suitability of the project location for projects, involvement of project owners in the feasibility study, the time taken to process loans, approved amount, and grace period are factors causing project loan default in the DBE head office. Furthermore, results from open-ended questions show that external factors (such as inflation, sudden policy change, power interruption, natural hazards), market problem, management problems, unavailability of raw materials and skilled labor, weak project follow-up and supervision, implementation delay, poor project appraising, working capital problem, elongated loan processing time, custom and logistic problem, and poor infrastructure are identified as causes for project loan default. Hence, to minimize the incidence of project loan default, this study suggests that the Bank should put in place appropriate and transparent loan processing time, and appropriate grace period for projects and should verify the involvement of project owners in the feasibility study. Besides, the bank needs to approve sufficient loan amounts and make sure that the extended loans are used for the planned purpose through timely credit monitoring. Moreover, the Bank should take precaution measures before extending credit facilities regarding the suitability of project location for project performers.