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Factors Affecting Credit Default: the Case of the Commercial Bank of Ethiopia

Abstract: 
Lending is one of the major functions of banks in all economies. In fact, interest charged on loans and advances today constitute a sizeable part of banks’ earnings. However, the possibility of failure of loans creates nightmares for not only the borrower and lender, but also poses a serious setback to the economy. One of the important matters in banking in general and lending in particular is the ability of a lending officer to confidently lend out money and be assured that these funds will be recovered from the borrower without resorting to punitive action. But, because of lack of information on credit defaulters, many credit officers are likely to still lend out funds that may never be recovered. The purpose of this study is to find out the causes of non-performing loans in the Commercial Bank of Ethiopia. To assess determinants of nonperforming loans a self administered questionnaire and structured review of documents and records of banks and in-depth interview of senior bank officials in CBE were used and probit regression model was adopted to measure the impact and significance of each independent variable on nonperforming loan. The empirical results from panel regression models suggest that poor credit appraisal, failed loan monitoring, underdeveloped credit culture, willful default by borrowers, fund diversion for unintended purpose and over/under financing by banks increase credit default. On the other hand, educated borrowers, experienced relationship manager and an increased relation of the borrower with the bank reduce credit default. It is therefore recommended that it is vital to equip credit officers with sufficient knowledge and skills in the field of lending to make them better analysts of credit assessment. Establishing credit bureaus in processing loans by incorporating them into the bank’s credit policy for all credit officers to adopt was also recommended. This would minimize bad loans and improve the quality of the bank’s loan portfolio.
 
Publisher: 
Ethiopian Economics Association (EEA)
ISBN/ISSN: 
978-99944-54-44-10
Primary Descriptors: 

Banks and Banking

Secondary Descriptor: 

Monetary Policy

Geographic Descriptors: 
Ethiopia
Cataloge Date: 
09/30/2015
Broad Subject heading: 
Capital Market
Call Number: 
330.963 PRO 2015
Serial Key Title: 
Proceedings of the Twelfth International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Volume: 
I
Publication date: 
2015-06-01 00:00:00
Conference Place: 
EEA Conference Center
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Book
Current frequency: 
Annually
Conference date: 
July 16 to 19, 2014