Acknowledgements

Above all, we are owed to the Almighty God for giving us the blessing to be here and
granting sanctification of health, enthusiasm, energy and patience and without his help,
nothing would happen.

Our special thanks must go to our Advisor Mulualem Getanuh (MSC) for his guidance, and
important advice towards to the completion of the proposal paper and for our future use too.
Sometime, long discussion has off no use, if not; ice breaking ides are there. Honestly,
speaking, on short discussions times, we spent with our advisor the ideas we secured,
experiences we exchanged have had an enormous use and advantage.

Finally we would like to thank those employees of CBE Bahir Dar district who are
responsible for uploading the resources which are mainly related with the our research title.
STUDENT DECLARATION

We, the undersigned declare that this paper titled “assessment of factors
affecting non-performing loan evidence from CBE Bahir Dar district ” is
our original work and that it has not been submitted to any other College,
Institution or University for BA degree or masters level all over the World.
NAME signature
Eyasu Muche -----------------------------------------
Kindye Mekuriaw -------------------- ---------------
Habtewold Hailie-------------------------------------
Frehiwot Temesgen-----------------------------------
Gedefaw Temesgen-----------------------------------

This paper has been presented for examination with the approval of the
assigned advisor.
Mulualem Getahun(MSC)

Bahir Dar Ethiopia

Signed: ___________________________Date: _________________________

 Table of Contents

Contents Page

CHAPTER ONE....................................................................................................................................1
1. Introduction.......................................................................................................................................1
1.1 BACK GROUND OF THE STUDY...........................................................................................1
1.2 Statement of the problem.............................................................................................................3
1.3 Objective of the study..................................................................................................................4
1.3.1 General objective..................................................................................................................4
1.3.2 Specific objective..................................................................................................................4
1.4 Research Questions......................................................................................................................4
1.5 Significance of the study..............................................................................................................5
1.6 Scope of the study........................................................................................................................5
1.7 Limitation of the Study................................................................................................................5
1.8 Organization of the study.............................................................................................................5
CHAPTER TWO...................................................................................................................................6
LITRATURE REVEW..........................................................................................................................6
2.1 Introduction.................................................................................................................................6
2.2 THEORETICAL REVIEW.........................................................................................................6
2.2.1 BANKING INDUSTRY IN ETHIOPIA...............................................................................6
2.2.2 NON PERORMING LOAN.................................................................................................7
2.3 FACTORS AFFECTING NON PERFORMIN LOAN................................................................7
2.3.1 INTEREST RATE................................................................................................................8
2.3.2 Credit Monitoring................................................................................................................8
2.3.3 Credit assessment..................................................................................................................9
2.3.4 Collateral............................................................................................................................10
2.3.5 Bank size............................................................................................................................11
2.4 EMPIRACAL REVIEW............................................................................................................11
2.5 CONCEPTUAL FRAMEWORK..............................................................................................12
2.6 Summary...................................................................................................................................13
CHAPTER THREE.............................................................................................................................14
RESEARCH METHODOLOGY.........................................................................................................14
3.1 INTRODUCTIN........................................................................................................................14
3.2 RESEARCH DESIGN...............................................................................................................14
3.3 RESEARCH APPROCH...........................................................................................................14
 3.4 DATA TYPE AND METHOD OF DATA COLLECTION......................................................15
3.5 Target population.......................................................................................................................15
3.6 Sampling size and sampling technique......................................................................................15
3.7 METHOD OF DATA ANALYSIS............................................................................................15
CHAPTER FOUR...............................................................................................................................16
4. Cost and time budget.......................................................................................................................16
4.1 cost budget.................................................................................................................................16
4.2 Time budget...............................................................................................................................17
REFERENCES....................................................................................................................................18
 CHAPTER ONE
1. Introduction
1.1 BACK GROUND OF THE STUDY
Banks are intermediaries between depositors and borrowers in an economy in which they are
distinguished from other types of financial firms by collecting deposit and offering loan
products (Heffernan, 1996). According to Bossone (2001), banks are special intermediaries
because of their unique capacity to finance production by lending their own debt to agents
willing to accept it and to use it as money. Hence, commercial banks are the dominant
financial institutions in most economies of developing or developed countries. They play a
critical role to emerging economies where most borrowers have no access to capital markets
(Bossone, 2001) Well-functioning commercial banks accelerate economic growth, while
poorly functioning commercial banks are an obstacle to economic progress and aggravate
poverty (Richard, 2011). As many authors studied that on their paper and facts observed in
different countries bank performance, interest on loans contributes significantly to interest
income of commercial banks.
In financial industry, shareholder value maximization requires a firm to engage in risk
management practices, by doing so you enhances the value of the firm and by implication, it
hmaximize the value to shareholders. Engaging on such risk business is mandatory to operate
the mediation and to cover the interest paid to depositors. Due to this nature of business,
commercial banks expose themselves to the risks of default from borrowers. However, the
major issue is how to minimize the rate of this risk? And How to increase asset quality of
financial institutions, or minimize the rate of non-performing loans by identifying factors that
causes it? A volatile economy and recent credit crisis show the importance of banks to
increase attention on how risks can be measured and kept under control as Loans represent
the majority of a bank’s assets. Lending is not an easy task for banks because of it creates a
big problem that is called non-performing loans. Failure to manage loans, which make up the
largest share of banks assets, would likely lead to the episode of high level of non -
performing loans(Barth J. R,2004).

There is no global and uniform definition for non-performing loans. Variations exist in terms
of the classification system, the scope, and contents (Green Baum and Thakor, 1995). Such
problem potentially adds to disorder and uncertainty in the non performing loan NPL issues.
International Monetary Fund (IMF, 2008) defined non-performing loan (NPL) as any loan in
which interest and principal payments are more than 90 days overdue; or more than 90 days’
worth of interest has been refinanced. On the other hand the Basel Committee (2001) puts
non-performing loans as loans left unpaid for a period of 90 days.
Non-performing loans are those loans that are ninety days or more past due or no longer
accruing interest or non-performing loans are those loans, which are not generating income.
This is also articulated by Caprio and Klingebiel (1996), as non-performing loans are those
loans which are relatively long period of time do not generate income that is, the principal
and/or interest on these loans have been left unpaid for at least ninety days. Non-performing
loans are closely associated with banking crises. Many authors argue that the magnitude of
non-performing loans is a key element in the initiation and progression of financial and
banking crises.

According to National Bank of Ethiopia’s (NBE’s) Directive no, SSB/43/2008 “Non-

performing loans” means outstanding credit facilities that are past due for more than 90 days
beyond the agreed-upon the repayment period. There is a relatively favourable environment
for banking industry and other financial institutions in Ethiopia. As of June 30, 2014 the
number of banks, operating in the country was nineteen, of which sixteen were private and
the remaining three are state-owned (NBE, 2014).
Loan quality is one of the indicators of financial sectors Research project on assessment of
factors affecting NPL, the case of Ethiopian private banks health. Most unsound financial
sectors show high level of non- performing loans within a country. The causes for loan
default vary in different countries and have a multidimensional aspect both, in developing
and developed countries. Theoretically, there are so many reasons as to why loans fail to
perform.
Some of these include depressed economic conditions, high real interest rate, inflation,
lenient terms of credit, credit orientation, high credit growth and risk appetite, and poor
monitoring among others. Bercoff et al, (2002) categorizes causes of non-performing loans to
Bank specific and Macroeconomic conditions.
According to National Bank of Ethiopia’s (NBE), report in 2012/13 there is continuous
increments of non-performing loans in Ethiopia from time to time even though its average is
below the set threshold. The reason given by different banks vary according to their less
quality asset performed, but in common, there are internal and external factors that cause it.
Therefore, in this study, non-performing loans are loans that are ninety or more days
delinquent in payments of interest and/or principal or loans categorized under substandard,
doubtful and loss as National Bank of Ethiopia’s groupings of unpaid loans. Hence, this
study will try to identify factors that affect non performing loans evidence from Commercial
Bank of Ethiopian Bahir dar District.

1.2 Statement of the problem

Non-performing loans have been widely used as a measure of asset quality among lending
institutions and are often associated with failures and financial crises in both the developed
and developing countries (Guy, 2011). Despite ongoing efforts to control bank-lending
activities, non-performing loans are still a major concern for both international and local
regulators. To date there is no bank crises happened in Ethiopia due to non-performing loans,
but there is an indicator of high NPL in the country, which may lead to that direction if not
controlled on time (NBE, 2010). The recent global financial crisis and the subsequent
recession in many developed countries have increased households and firms’ defaults,
causing significant losses for banks. This calls for regular monitoring of loan quality,
possibly with an early warning system capable of alerting regulatory authorities of potential
bank stress to ensure a sound financial system and prevent systemic crises. Prudent risk
management, with a special emphasis to credit risk is pivotal. To put in place adequate credit
management tools, understanding factors that contribute to the occurrence of bad loan play a
crucial role.
There are two factors affecting the occurrence of non-performing loans, namely
macroeconomic factors and bank specific factors. Macroeconomic factors include
government policy, inflation, currency change and GDP and the bank specific factors include
interest rate charged by banks, bank size, ownership (state owned and private), integrity
problem, credit follow up weakness, and others investigated by many researchers outside
Ethiopia such as Ricardas Mileris in 2014,Uma Murthy in 2017 and Naail Mohammed Kamil
in 2017 related studies were made in many countries as stated in knowledge gap but most of
them are analyzed on limited factors such as bank size, interest rate and credit monitoring.
However, the researcher wants to see all these bank specific factors as there is evidences of
non-performing loans is seen in our country and not made on private banks in Ethiopia as to
the knowledge of the researcher. Therefore, assessment study is important to identify root
causes of private commercial banks NPL and their impact on financial performance in the
context of Ethiopian commercial banks.
Even though some studies made outside Ethiopia on the related topic the researcher want to
investigate the reality studied in Ethiopian context. Due to different reasons that we have
such as, undeveloped credit culture, controlling system, availability of technology, instability
of government policies on credit, knowledge gap we have, credit follow up, shareholders
influence, incapability of supervisory body and many other factors that makes our country
different.
The investigator selected these to see the affecting factors of non-performing loans. From the
age and other factors that caused NPL in CBE Bahir dar district. This problem along with the
knowledge gap in literatures that have provoked the researcher to investigate the causes for
the existence of high level of non-performing loans in commercial banks of Ethiopia. The
basic research question will be investigated in this project is that what are the major factors
affecting NPL in commercial bank of Ethiopia Bahir dar district.

1.3 Objective of the study

1.3.1 General objective

The overall objective of this study is to assess factors that affect non- performing loans in
Ethiopian banks especially related commercial bank of Ethiopia Bahir dar district.

1.3.2 Specific objective

Specifically, this study aims to access what are the major bank specific factors that causes
non-performing loans
 To assess poor Credit assessment contributes to the occurrences of NPL in
commercial Banks.
 To assess the relationship between lack of Credit Monitoring and NPL occurrences.
 To assess holding collateral, reduces the occurrence of loan default.
 To assess the bank size and interest rate cause loan default.

1.4 Research Questions

The following research questions were developed to assess the relationship of factors that
causes NPL. Therefore, this research tries to answer the following research questions, mainly
what are the major factors that describe non-performing loans in the case of commercial bank
of Ethiopia Bahir dar.
RQ1: Does poor Credit assessment contribute to the occurrences of NPL in commercial
Banks?
RQ2: Is there relationship between lack of Credit Monitoring and NPL occurrences?
RQ3: Does holding collateral, reduces the occurrence of loan default?
RQ4: Does bank size and interest rate cause loan default?
1.5 Significance of the study
This investigation would help Ethiopian Banks to get insight on what it takes to improve their
loan qualities and the central Bank (NBE) to examine its policy in banking supervision
pertaining to insure asset quality of banks to be maintained. This study will also have great
contribution to the existing knowledge in the area of factors that cause NPL in commercial
banks and their impact on financial performance in the context of Ethiopia. This in turn
contributes to the wellbeing of the financial sector of the economy and the society as a whole.
Therefore, the major beneficiaries from this study will be each commercial banks in Ethiopia,
regulatory bodies, the academic staffs of the country, the society as a whole and the
investigator for partial fulfilment of BA degree

1.6 Scope of the study

Even though macroeconomic factors have a huge impact on qualities and performance of
loans, this study has been limited to bank specific factors. Thus, the study will not explore
macro-economic factors that cause loan defaults. Besides, the data will use only commercial
bank of Ethiopia Bahir dar district.

1.7 Limitation of the Study

The study is limited to bank employees’ personal perception, and some data records of
respective Banks. Non-availability of some data (number of loan applicant of each bank,
number of loan disbursed and name of defaulters to interview) from Banks may hinder the
quality of the finding. However, the researcher will try his best to obtain and ensure genuine
and adequate data from the CBE Bahir Bar district.

1.8 Organization of the study

This study will be organized in five chapters. The first part, which is Chapter one deals with
introduction part, includes background of the study, statement of the problem, objective of
the study, research question, significant of the study scope and limitation of study provides
the general introduction about the whole report. Chapter two presents the review of related
literatures. Chapter three provide detail description of the methodology employed by the
researcher. Chapter four contains data analysis presentation and interpretation. Finally, the
last chapter five concludes the total work of the research and gives relevant recommendations
based on the findings.
CHAPTER TWO
LITRATURE REVEW
2.1 Introduction
The main objective of this chapter is to look at the relevant and available literature entailing
to non performing loan. The chapter also highlights and explains issues and factor influencing
non-performing.

2.2 THEORETICAL REVIEW

2.2.1 BANKING INDUSTRY IN ETHIOPIA

Modern Banking in Ethiopia was started in the year 1905 when the Bank of Abyssinia was
established. Bank of Abyssinia was formed under a fifty- years franchise agreement made
with the National Bank of Egypt, which was owned by the British and it operate around
twenty six years and the liquidation formally on August 29, 1931, during this the Bank of
Abyssinia was replaced by the Bank of Ethiopia (NBE,2010.) .Bank of Ethiopia was a
national Bank and one of the first indigenous banks in Africa (NBE, 2010). The Bank of
Ethiopia operated until 1935 and ceased to function because of the Italian invasion. During
the five years of the Italian occupation (1936-41), many branches of the Italian Banks were
operational in the main town of Ethiopia. After evacuation of Italians, the State Bank of
Ethiopia was established on November 30, 1943 with a capital of one million Marian
Treasury of the Ministry of Finance. Pursuant to the Monetary and Banking Law of 1963, the
State Bank of Ethiopia that had served as both a central and a commercial bank was dissolved
and split into the National Bank of Ethiopia and Commercial Bank of Ethiopia S.C. National
Bank of Ethiopia’s activity is central banking whereas Commercial Bank of Ethiopia’s duty
is performing business (normal banking operations). In 1974 change of government and the
command economic system, which had prevailed in the country, the Commercial Bank of
Ethiopia S.C. and other banks and financial institutions were nationalized on January 1st,
1975. The nationalized banks were re-organized in one Commercial Bank of Ethiopia and
two specialized banks- the Agricultural and Industrial Bank (AIB), renamed as the
Development Bank of Ethiopia (DBE) and a Housing and Savings Bank (HSB) currently
named as the Construction and Business Bank (CBB) (NBE, 2010). Following the fall of
Derge regime in 1991 and the change of economic policy directions, financial institutions
were re-organized to operate towards a market oriented policy framework. Accordingly the
country enumerated policy and proclamation for operation. The Licensing and Supervision of
Banking Business No.84/1994 under Monetary and Banking proclamation No.83/1994 had
allowed the establishment of private banks and has marked the beginning of new era in the
Ethiopian banking sector.

2.2.2 NON PERORMING LOAN

NPL is a loan that is in default o close to being in default. A loan is said to be in default when
it fails to make the repayments of principal or interest specified in its loan contract and has no
intention of repaying the future (pilbeam, 1998). Many loans become non-performing after
being in default for 3 months, but this can be depending on the contract terms. According to
vigano (1993), NPLs are loans, especially mortgages that organizations lend to borrower but
do not capitalize on. In other words, the borrower cannot pay the loan back in full, or even
enough for the bank to make a profit.

According to Timothy (1994), loans are regarded as default when they are placed on non-
accrual status or when the terms are significantly altered in a restructuring. Non- accrual
means that banks deduct all interest on the loans that was recorded but not actually collected.
Banks have traditionally stopped accruing interest when debt payments were more than 90
past due. Many banks did not place loans on non-accrual if they were brought under 90 days
past due by the end of the reporting period. Moreover, NPLs includes loans and advances (a)
that is not earning income; (b) on which full payment can no longer be expected and
payments are more than 90 days delinquent; (c) total credits to the accounts are insufficient to
cover interest charges over a 3-month period; or the maturity date has passed and payment
has not been made (eastern caribeancentral bank, 2009).Similarly,Asari(2011) defined NPL
as defaulted loan in which banks are unable to profit from them.

2.3 FACTORS AFFECTING NON PERFORMIN LOAN

Loan is a major source of banks income and constitutes their major assets; it is risky area of
the industry. That is also why credit risk management is one of the critical risks. Management
activities carried out by firms in the financial services industry. in fact, from all risks banks
face, credit risk arises from uncertainty in a given counter party’s ability to meet its
obligations. The solidity of banks portfolio depends on the health of its borrowers. In many
countries, failed business enterprises bring down the banking system (Alemu, 2001). Sited in
W.N. Geleta, 2011). A sound financial system, among other things, requires maintenance of a
low level of NPLs which in turn facilitates the economic development of a country.

The literature identifies two sets of factors to explain the evolution of NPLs over time. One
focuses on external events such as the overall macroeconomic conditions, which are likely to
affect the borrower’s capacity to repay their loans, while the second group, which looks more
at the variability of NPLs across banks, attributes the level of NPLs to bank level.

2.3.1 INTEREST RATE

Lending interest rate as a price of money reflects market information regarding expected
change in the purchasing power of money or future inflation (Ngugi, 2001). Monetary
contraction and interest rate increase reduce spending directly; both also reduce spending
indirectly by shrinking bank loan supply (Bernanke and Blinder, 1988). many of the debts
were attributable to moral hazard; the adverse incentives on bank owners to adopt imprudent
lending strategies, in particular insider lending and lending at high interest rates to borrowers
in the riskiest segments of credit markets. Bank lending rates are mostly seen as being rigid
for the reason that they do not move intended with the markets. A number of explanations
have been suggested to account for the rigidity in bank lending rates. In the case of loans, the
rigidity has been as a result of the rationing of credit to borrowers owing to the fact that there
are problems of asymmetric information (Blinder and stiglitz, 1983).in deed financial markets
are not perfect; in the presence of adverse selection and moral hazard issues, banks are more
likely to opt for credit rationing than to adjust their lending rates in a situation where there
has been an upward adjustment of interest rates by the central bank. It may also be possible
that when and banks large banks capture large market share, the impact of tight monetary
policy on bank lending will be minimal.

A study conducted by Espinoza and Prasad (2010) focused on macroeconomic and bank
specific factors influencing non-performing loans their effects in GCC banking system. After
a comprehensive analysis, they found that higher interest rates increase NPLs but the
relationship was not statistically significant. The interest rate affects the difficulty in
servicing debt, in the case of floating rate loans. This implies that the effect of the interest
rate should be positive, and as a result the increasing debt burden caused from rising interest
rate payments should lead to higher number of NPLs.

2.3.2 Credit Monitoring

Lending decision is made on sound credit risk analysis /appraisal and assessment of credit
worthiness of borrowers. Nevertheless, past records of satisfactory performance and integrity
are no guarantee future, though they serve as useful guide to project trend in performance. A
loan granted based on not sound analysis might go bad because of the borrower may not meet
obligations per the terms and conditions of the loan contract. It is for this reason that proper
follow up and monitoring is essential.
Monitoring or follow-up deals with the following vital aspects:
 Ensuring compliance with terms and conditions
 Monitoring end use of approved funds
 Monitoring performance to check continued viability of operations
 Detecting deviations from terms of decision
 Making periodic assessment of the health of the loans and advances by
nothing some of the key indicators of performance that might include
profitability, activity level and management of the unit and ensure that the
assets created are effectively utilized for productive purposes and are well
maintained.
 Ensuring recovery of the instalments of the principal and interest in case of
term loan as per the scheduled repayment program
 Identify early warning signals, if any, and initiate remedial measures thereby
averting from

2.3.3 Credit assessment

Palubinskas and Stough (1999) note that the failure of a bank is mainly seen as a result of
mismanagement because of bad lending decisions made with respect to wrong appraisal of
credit status, or the repayment of non-performing credits and excessive focus on giving loans
to certain customers. Good hart et al (1998) also state that poor credit control, which results
in undue credit risk, causes bank failure. Bad lending tradition leads to a large portfolio of
unpaid loans. This results in insolvency of banks and reduces funds available for fresh
advances, which eventually causes a financial crisis. Good hart et al. (1998) noted that
connected lending to the causes of bank failure. Lack of dependable financial information on
borrowers to help in assessing creditworthiness causes a bank failure also.
National economic downturn, insider lending, political connection of bank owners, customer
failure to disclose vital information during the loan application process, lack of proper skills
amongst loan officials were among major factors identified in other countries to cause non-
performing. Controlling non-performing loans is very important for both the performance of
an individual bank and the economy’s financial environment. It is thus the essence of this
study to establish factors behind nonperforming loans in Ethiopia and strategies at place to
cater
2.3.4 Collateral
Collateral also called security is the assets that the borrower pledges to the bank to mitigate
the bank’s risk in event of default (Sinkey, 2002) .It is something valuable which is pledged
to the bank by the borrower to support the borrower’s intention to repay the money advanced.
Security is held to mitigate the bank’s risk in the event of default and is considered as a
secondary source of repayment (Koch & MacDonald, 2003). Supporting of the
aforementioned, Rose and Hudgins (2005) define secured lending in banks as the business
where the secured loans have a pledge of some of the borrower’s property (such as home,
Machineries, merchandise or vehicles) behind them as collateral that may have to be sold if
the borrower defaults and has no other way to repay the lender. The purpose of security is to
reduce the risk of giving credit by increasing the chances of the lender recovering the
amounts that become due to the borrower. Security increases the availability of credit and
improves the terms on which credit is available. The offer of security influences the lender’s
decision whether or not to lend, and it changes the terms on which it is prepared to lend,
typically by increasing the amount of the loan, by extending the period for which the loan is
granted and by lowering the interest rate (Norton and Andenas, 1998: 144). According to De
Lucia and Peters (1998), in the banking environment, security is required for the following
three reasons:
 To ensure the full commitment of the borrower to its operations
 To provide protection should the borrower deviate from the planned course of action
outlined at the time credit is extended, and
 To provide insurance if the borrower default
The security value of an asset is based on the estimated re-sale value of the assets at the time
of disposing of it (McManus, 2000) The specific type of property is valued by the bank to
determine the property’s market value for security purposes. Besides the physical collateral, a
third party can provide a surety ship for the debt of the borrower. Should the borrower not be
in a position to repay the debt, the bank will then call on the surety for repayment (Koch &
MacDonald, 2003). It is normal banking practice for the banks to take the surety ships of the
shareholders/directors when funds are advanced to a company (Rose, 2000). C’s are well-
known credit assessment principles, commercial banks have developed their own qualitative
credit risk assessment models to assess whether the bank will agree to lend to a specific
business. Based on the credit information obtained about the borrower and credit assessment
carried out, either by quantitative or qualitative model or by combination of both, credit
sanctioning is done.
2.3.5 Bank size
According to study of commercial banks in India, by use of panel regression analysis of
Rajan and Dhal (2003) indicates that , banks size have significance on occurrence of NPLs
Salas and Saurina (2002) indicated that bank size, is among the factors that explained
variations in NPLs for Spanish banks. A policy concern is that too-big-to-fail banks may
resort to excessive risk taking since market discipline is not imposed by its creditors who
expect government protection in case of a bank’s failure (Stern and Feldman, 2004).
Consequently, large banks may increase their leverage too much and extend loans to lower
quality borrowers (Louzis et al, 2011). Boyd and Gertler (1994) argue that in the 1980s the
tendency of US large banks towards riskier portfolios was encouraged by the US
government’s too-big to-fail policy. On the other hand, Ennis and Malek (2005) examine US
banks’ performance across size classes over the period 1983–2003 and conclude that the
evidence for the too-big-to-fail distortions is in no way definite.

2.4 EMPIRACAL REVIEW

According to Shaer, et al. (2012) on their assessment of Effective Factors on Non-Performing
Loans, empirical evidence from Iran (2006-2011) where identified significant relationships
between collaterals, credit background of customers, and duration of loans payment. Chemjor
Sylvia (2007), on his study of significance of the factors contributing to NPLs in commercial
banks in Kenya, pointed that poor monitoring and control of loans by bank management,
breach of contract, lack of proper knowledge, bankruptcy of the debtor and closing down of
businesses with commercial bank loan due to unfair competition.
In Spain, Fernandez, et al, (2000) pointed out that despite bank supervisors being aware that
most banking crises were directly related to inadequate management of credit risk by
respective institutions.
Nishimura, et al, (2001) studied the situation in Japan and concluded that some of the loans
made to companies during the bubble era became non-performing when the bubble burst.
Gorter and Bloem (2002) argued that non-performing loans are mainly caused by an
inevitable number of wrong economic decisions by governments.
In Africa, Brownbridge, (1998) concluded that many of the bad debts in banks were
attributable to moral hazards; the adverse incentives on bank owners to adopt imprudent
lending strategies. From the researchers conducted above one can observe different
commercial banks in Spain, China, Kenya, Iran, Tanzania and others are assessed in relation
with different factors that causes nonperforming loans and forded their finding and
recommendations for the countries. For example, In Kenya banks shift away from
concentration on security based lending and put more emphases on the customer ability to
meet the loan repayment and in China NPLs is transferred to Asset management (Waweru
and Kalani, 2009)
In Ethiopia,Wondmagegnehu(2012) in his study ‘determinants of NPLs on commercial bank
of Ethiopia’ revealed that under developed credit culture, poor credit assessment, aggressive
lending, botched 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 un expected purposes and overdue
financing has significant effect on NPLs. Mitiku (2014) studied the determinant of
commercial banks’ lending; evidence from Ethiopian commercial banks using panel data of
eight commercial banks in the period from 2005-2011 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 ordinarily least square (OLS) technique, the study found that there was significant
relationship between commercial bank lending and its size, credit risk, GDP and liquidity
ratio.

The study conducted by Gadsegezu (2014) on determinants of NPLs on commercial bank of

Ethiopia. The finding revealed as loan to deposit ratio had positive where as inflation rate had
negative, but insignificant effect on NPL of commercial bank of Ethiopia. However, bank
profitability measured in terms of return on equity, banks capital adequacy ratio and lending
rate had negative and statistically significant effect whereas bank profitability measured in
terms of return asset and effective tax rate had positive and statistically significant effect on
NPLs of commercial banks in Ethiopia. The accumulation of NPLs generally attributable to a
number of factors, including economic down turns and macro-economic volatility..

2.5 CONCEPTUAL FRAMEWORK

According to Shields (2013), a conceptual framework was expressed as the way ideas are
organized to achieve a research project’s purpose. It is connected to the research purpose. A
conceptual framework is a basic structure that consists of certain abstract blocks which
represent the observational, the empirical and the analytical/ synthetically aspects of a
process or system being conceived. The objective of this study is to assess the major bank
specific factors for the occurrence of NPLs of CBE in case of CBE Bahir dar district. The
bank specific factors include high interest rate, credit size, poor credit assessment and credit
monitoring and lenient credit.

Figure 1; conceptual frame work

BANK SPECIFIC FACTORS

 High interest rate

NON PERFOMING
LOANS  Bank size

 Credit assessment

 credit monitoring

 collateral

2.6 Summary
In this chapter, the researcher highlights the main concepts of different literatures regarding
theoretical and empirical review of NPL. It also outlined the factor affecting NPL .Such as
high interest rate, bank size, credit assessment, credit monitoring and collateral.
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTIN
The objective of this study is to assess the factors affecting non-performing loan in
commercial bank of Ethiopia. This Chapter includes the research design and approach, Data
type, source and methods of Data collection, population and sampling technique and method
of data analysis.

3.2 RESEARCH DESIGN

To conduct this study, the researcher would apply a descriptive research design. Because
descriptive research is used to describe the state of view as it exists at present. It answers
questions like what, where, when, who and how.

3.3 RESEARCH APPROCH

This study will be used both quantitative and qualitative (mixed) approach. Quantitative
approach is based on the measurement of quantity or amount. The use of quantitative strategy
is necessary when the researcher want to deeply investigated and analyze an event, program
and problem very well (Creswell, 2003). The purpose of quantitative aspect of study is to
seek information that can be generalized about the association between bank specific factors
and non-performing loans at commercial bank of Ethiopia in case of Bahir dar district. The
study will have based on survey design with a semi structured, self-administered
questionnaire document analysis. On the other hand, the purpose of qualitative approach is to
search the data that can supplement the gap that might not be captured by the quantitative
approach and to obtain deeply understanding of the bank specific factors that will cause the
occurrence of nonperforming loans.

The qualitative research process is more holistic with specific focus on design; measuring
instruments and interpretation developing possibly change along the way. The approach
operates under assumption that reality is not easily divided into discrete and measurable
variables. Also literature search, talking to experts in the field, interviews, Case studies,
surveys are analyzed under qualitative approach.
Qualitative research approach makes considerable use of inductive reasoning. Under this
approach, many specific observations will be made to draw inferences about larger and
general phenomenon while personal and literary style language will be used when reporting
the findings. The investigator used interviews and questionnaires developed based on the
literature search which is one of the qualitative method of collecting data and fill the gap that
quantitative approach miss in interviewing key senior staffs

3.4 DATA TYPE AND METHOD OF DATA COLLECTION

To conduct this study, the researcher will use primary and secondary data. The primary data
were collected through questioner and interviews. The questioner dispatches the bank to
identify the major factors that affect nonperforming loans. The secondary data will be
collected from published and unpublished materials that include annual reports, directives,
brochures, magazines, credit manuals, procedures, other local and international financial
institution documents and other documents that are related to the sated topic will be used.

3.5 Target population

For the purpose of identifying the necessary information about non performing loan
Commercial Bank of Ethiopia Bahir Dar Branch, the target population of the study will be
employees who are directly involved in loan processing and administrating. This means
senior Bank professionals, department heads, branch managers, assistant branch managers,
loan section heads, loan officers, loan clerk, and loan committee members of the branch will
be included in target population.

3.6 Sampling size and sampling technique

In Commercial Bank of Ethiopia, Bahir Dar branch credit processing and administrating
department there are 29 employees. The researchers will be used judgmental or purposive
sampling. The reason for using judgmental sampling is to involve the personnel who have
understanding about the topic under the study. Therefore, the researchers will be used their
own judgment to select people who is familiar with the sampling frame and have a particular
expertise or knowledge which make them suitable and select target respondent that provide
the relevant information, and all of credit processing and administrating department
employees will be included under the study.

3.7 METHOD OF DATA ANALYSIS

The data that we would obtain from primary and secondary sources would be analyzed,
presented and interpreted by using descriptive data analysis. The result of the analysis would
be presented by using tables and percentages, and conclusion would be drawn based on the
analysis and summarized data.
CHAPTER FOUR
4. Cost and time budget
4.1 cost budget
This shows how much it will cost to conduct the research. We state cost for every budget
item that should be quantitatively shoe typically, our personal cost budget reflect costs such
as:

Personnel, consumable supplies, travel, communication, publication and so on

Material Quantity cost per quantity Total cost

Paper 100 0.5 50

Pen 6 5 30

Internet 30 5 150

Photocopy 75 0.5 35

Print 50 1 50

Typing 50 4 200

Mobile card 4 15 60

Transportation 12 10 120

Miscellaneous 100
expense

Total 795
4.2 Time budget
It describes the plan of assessing the ongoing progress toward achieving the
research objectives. It specifies how each project activity is to be measured in terms of
completion, the time line for its completion. Therefore, to enable us perform our task in a
timely manner and the advisor to monitor project progress and provide timely feedback for
research modification or adjustments we provide the following time plan

Job November December January February March April May June

 
Title
selection

Proposal 
develop
 
Literature
review

Primary
data
collection
 
Secondary
data
collection

Related
review
literature

Editing 
and
coding

Data 
analysis

Writing 
report
and
discussion

presentati
on
REFERENCES
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 BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Assessment of Factor Affecting non-performing loan evidence for

commercial bank of Ethiopia Bahir Dar District

Research proposal submitted for the partial fulfilment of

requirement for BA degree in Accounting and Finance

By

NAME ID

Kindye mekuriaw --------------------- 0802216

Habtewold hailie------------------------0802177
Frehiwot temesgen----------------------0802127
Gedefaw temesgen----------------------0802135
Eyasu muche ----------------------------0802102

Advisor; Mulualem Getanuh (MSC)

January 2018

Bahir Dar, Ethiopia

 LIST OF ACRONOMY

NBE-National bank of Ethiopia

CBE-Commercial Bank of Ethiopia

NPL-Non performing loan

IMF-International monitory fund

AIB-Agricultural and industrial bank

CBB-Construction and Industrial bank

HSB-Housing and Saving bank

DBE-Development bank of Ethiopia

GDP-Gross domestic product

OLS-Ordinarily least square