Determinants of Non-Performing Loans: A Case Study of the Development Bank of Ethiopia

Abstract

This study investigates the determinants of non-performing loans (NPLs) in the Development Bank of Ethiopia (DBE). Using a mixed-methods approach, the research collected primary data from 114 loan officers at DBE’s head office and secondary data from bank records. Explanatory and descriptive research designs were employed, with data analyzed via descriptive statistics, correlation analysis, and multiple linear regression. The study identified poor credit assessment, poor collateral strength, high interest rates, large credit size, and poor credit monitoring as significant bank-specific factors contributing to NPLs. Loan diversion and weak borrower credit culture were found to be statistically insignificant. The model explained 67.6% of NPL variation. The findings underscore the need for DBE to strengthen credit appraisal, monitoring, collateral evaluation, and interest rate policies to mitigate NPL risks and enhance financial stability.This research contributes to the existing body of knowledge by providing empirical evidence on the specific drivers of NPLs within a development finance institution in the Ethiopian context, an area where limited research exists. The identification of important bank-specific characteristics has practical significance for DBE management in order to enhance loan portfolio quality and improve credit risk management techniques. Future studies should look into how macroeconomic factors affect non-performing loans (NPLs) at DBE, how well various NPL resolution techniques work, and how regulatory oversight helps reduce NPL risks in Ethiopia's banking industry. Furthermore, qualitative studies could provide deeper insights into the behavioral aspects of borrowers and loan officers that contribute to NPLs