College of Finance, Management and Development

Department of Public Financial Management and Accounting

Factors on Assessment of Non-Performing Loans in

Development Bank of Ethiopia

By

Mesfin Sahle

I.D.NO. ECSU1703761

Under the Supervision of

Shemelis Zewdie (Assistant Professor)

A Thesis Submitted to the department of Public Financial Management and

Accounting, College of Finance, Management and Development at Ethiopian Civil
Service University, in Partial Fulfillment of the Requirements for the Award of a
Masters of Arts Degree in Accounting and Finance.

January, 2020

Addis Ababa, Ethiopia

 Declarations

I Mesfin Sahle, Registration Number/I.D. Number ECSU1703761, do hereby declare that this
Thesis is my original work and that it has not been submitted partially; or in full, by any other
person for an award of a degree in any other university/institution.

Name of Participant……………….Signature……………………. Date…………….

This Thesis has been submitted for examination with my approval as College supervisor.

Name of Advisor……………………Signature……………………. Date……………

i
 APPROVAL

The undersigned certify that they have read and hereby recommend to the Ethiopian Civil
Service College to accept the Thesis submitted by Mesfin Sahle, and entitled “ An Empirical
Analysis of Factors of Nonperforming loans: The Case of Development Bank of Ethiopia ” in
partial fulfilment of the requirements for the award of a Masters Degree in Public Finance
Management.

Name of Supervisor __________________________ Signature ______________

Date__________________

Name of Internal Examiner ____________________ Signature ______________

Date _________________

Name of External Examiner ___________________ Signature ______________

Date __________________

Name of Head of Department __________________ Signature ______________

Date _________________

ii
 ACKNOWLEDGMENTS
My heartfelt thanks go to the Almighty God and his mother St. Marry, who follow me in all
aspects of my life. First, I would like to thank my Advisor Shemelis Zewdie (Assistant
Professor) for his assistance throughout my study. I would also like to express my deepest
gratitude to my friends, for they support, encouragement, invaluable comments, advice and
guidance at various stages of my study. Finally, I would also like to convey my sincere thanks to
my family, especially my wife Rahel Bekele, whose unconditional love and encouraged me
throughout my life.

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 Abstract
This paper investigates the factors of Nonperforming loans in the Development Bank of
Ethiopia. This study used descriptive research design and the data has been collected through
the primary source from both borrowers and staff of the bank. A questionnaire was used to
collect relevant data for the study, and stratified sampling technique was used in the selection of
each respondent. The data gathered through the questionnaire were presented by Statistical
Package for Social Science (SPSS, Version 21) through the analysis of descriptive statistics
including percentages. It was found that poor credit assessment and credit monitoring are the
major causes for the occurrence of nonperforming loans in Development bank of Ethiopia in
consideration from the bank’s aspect. Delay in implementation of the project and
underestimation of initial cost, are the main reasons for occurrence of NPLs from customer
specific factor viewpoint. Causes of nonperforming loan from external specific factor point of
view are foreign currency related issues and project owners’ incapability is a major factor for
NPLs’. Therefore, to reduce the occurrence of loan default it is suggested that the Bank should
strengthen its loan assessment to select the potential risk taking applicants and adopt
appropriate pre and post credit risk assessments. Proper monitoring in every loan is necessary
and the bank credit process needs to be transparent and accountable.

Key words: Bank Specific Factors, Factors of Borrowers capacity, External Factor,
Nonperforming Loan.

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ABBREVIATIONS & ACRONYMS
CRMD Customer Relation Management Directorate
DBE Development Bank of Ethiopia
NPL Non-Performing Loan
NPLs Non-Performing Loans
PRLR Project Rehabilitation and Loan Recovery
PAD Project Appraisal Directorate

Table of Contents
v
DECLARATIONS............................................................................................................................i
APPROVAL....................................................................................................................................ii
ACKNOWLEDGMENTS..............................................................................................................iii
ABSTRACT iv
ABBREVIATIONS & ACRONYMS v
CHAPTER ONE 1
INTRODUCTION 1
1.1. Background of the Study...................................................................................................1
1.2. Statement of the Problem..................................................................................................3
1.4. Research Objective(s).......................................................................................................6
1.4.1. General Objective......................................................................................................7
1.4.2. Specific Objectives....................................................................................................7
1.5. Significance of the Study..................................................................................................7
CHAPTER TWO 9
Review of Related Literature to factors of Non-performing loan 9
2.1 Introduction……………………………………………………………………………..……9

2.2 Theoretical Review…………………………………………………………………….…….9

2.2.1 Project definition and concepts………………………………………………….………9

2.2.1.1 Plans and Projects……………………………………………………………………10

2.2.1.2 Project Life Cycle…………………………………………………………………….10

2.2.1.3 Characteristics of a project life cycle............................................................................11

2.2.2 Project financing definition and concepts…...……………………………………………12

2.2.2.1 Basic Characteristics of Project Finance………………………………………………12

2.2.2.2 Bank Lending in Project Finance………………………………………………………13

2.2.2.3 Role of Debt in Project finance...………………………………………………………14

2.2.3 Project Default /NPL/ definition and concepts……………………………………………14

2.3 Factors of NPL…………………………………..……………………………………….…16

2.4 Empirical Literature………………………………...……………………...………………..17

2.4.1 Empirical Studies on Ethiopia………………..…………………………………………19

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 2.4.1.1 Bank Specific Factorsof Project Loan Default………………………..……………..20

2.4.1.2 Borrower Specific factors of Project Loan Default.....................................................20

2.4.1.3 External Factors of Project Loan Default…………………………………...……….20

2.5 Summary & Research gap………………………..………………………………………...21

2.6 Conceptual Framework..........................................................................................................22

CHAPTER THREE 24
Research Methodology 24
3.1. Introduction.....................................................................................................................24
3.2. Research Design and Approach......................................................................................24
3.2.1. Research Design......................................................................................................24
3.2.2. Research Approach..................................................................................................24
3.3. Population and Sample....................................................................................................25
3.3.1. Target Population.....................................................................................................25
3.3.2 Sources and tools of data collection……………………………………………….26

3.4 Data Analysis…………………………………………………………………….…….26

3.5 Descriptive Analysis…………………………………………………………….……..27

3.6 Quantitative data analysis………………………………………………………...……27

3.7 Nature of Data and Instruments of Data Collection........................................................27

3.7.1 Sample Selection.....................................................................................................28
3.7.2 Sample Size Determination……………………………………...………………..28

3.7.3 Sampling Design……...…………………………………………………………..28

3.7.4 Sampling Techniques and Procedures…...……………………………………….28

3.8 Data Processing and Analysis............................................................................................29

3.8.1 Data Processing............................................................................................................29
3.9 Ethical Consideration………..…………………………………………………………...29

CHAPTER FOUR 30
Data Presentation, Analysis and Interpretation 30
4.1. Introduction.....................................................................................................................30
4.2. General information of Respondents..............................................................................30

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 4.3. Bank Specific Factors.....................................................................................................33
4.3.1 Credit Assessment and NPLs…………………………………………...…………33

4.3.2. Credit Monitoring and NPLs...................................................................................34

4.3.3. Credit Size and NPLs...............................................................................................35
4.3.4. Credit terms and conditions.....................................................................................36
4.3.5. Interest rate and NPLs.............................................................................................37
4.3.6 Relation between Interest rate and nonperforming loans……………………..…..37

4.3.7. Management Quality and NPLs...............................................................................38

4.4. Borrower Specific Factors..............................................................................................38
4.4.1 Loan diversion…………………………………………………………………………38

4.4.2 Poor credit management………………………………………………………………39

4.4.3 Willful default………………………………………………………………….……39

4.4.4 Intervention of external bodies in credit decision making…………………………...40

4.4.5 Market Condition…………………………………………………………………….40

4.4.6 Borrower credit culture………………………………………………………………41

4.5 External Specific Factor.......................................................................................................41

4.5.1 External Factors and nonperforming loans………………………………………..…...42

5.1 Introduction……………………………………………………………………….………..44

5.2 Summary…………………………………………………………………………………...44

5.3 Conclusion………………………………………………………………………….…….44

5.4 Recommendation…………………………………………………………………………46

References 48
APPENDIX : QUESTIONAIRESE……………………………………………………………...52

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List of Table
Table 1: NPLs from 2009 up to 2019 …………….......................................……………….……5

Table 2: Distribution of DBE staff by Directorates …………………….………………….……26

Table 3: Proportional sample size for the study .....................................................................…...29

Table 4: Relation of the respondents’ age and business sector..........……….……..…………….30

Table 5: Customers’ Educational level and Gender ………………………….…………………31

Table 6: Number Years as a bank customer ........…………………………………………….... 31

Table 7: Employee job position and Age........................ ………….……………….……………32

Table 8: Employee Years service and Gender.....................................….……………………….33

Table 9: Relation between credit Assessment and loans and default.................... ….………..…33

Table 10: Credit Monitoring and Loan Default.......................................……………….…….....34

Table 11: Credit size and Loan Default..................…………………………………….………..36

Table 12: Credit terms and Condition...……………………………………………….…………37

Table 13: Interest rate and NPLs ...........................................................................................…...38

Table 14: Management Quality and NPLs......................................................................….…..…38

Table 15: Diversion of loans funds and income by borrowers and loan default…….......………39

Table 16: Poor credit management capacity of Borrowers ……………………....….….……….39

Table 17: Wilful Default Approved ......................................................................................…....39

Table 18: Intervention of External bodies in credit decision making and loan default…….........40

Table 19: Market condition and loan default …………………….........................….….……….41

Table 20: Relationship between loan default and borrower culture .............................................41

Table 21: External factors and non-performing loan in DBE.......... .............................................4

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 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study

Financial sector plays a vital role for the growth and development of a country (Mabw and Robert,
2010). One of the financial institutions is bank in which they play an intermediation function by
mobilizing money from those who have excess and lend it to others who need it for their investment.
As a result providing credit to borrowers is one means by which banks contribute to the growth of
economy thereby ensure that the money available in economy is used for productive and fertile
project purpose which can stimulate the economy as well. Therefore, managing loan in a proper way
not only has positive effect on the banks performance but also on the borrower firms and a country as
a whole (Mabw and Robert, 2010).

To contribute to the development of the economy of a country, banks play an intermediary role by
transferring excessive funds from the depositors to the borrowers through lending system so that the
collected money can continue to earn income from interest (Suryanto, 2015). In their article
Vatansever & Hepsen (2013) stated that loans generate huge interest income which is a critical
measure of the bank’s financial performance and stability.

Despite of the intermediary role they are expected to play in the economy, banks operate with the
purpose of earning returns without assuming excessive risk. Alexandri & Santoso (2015), concluded
that failure to manage loans, which make up the lion’s share of banks assets, would likely lead to high
Non-Performing Loans (NPLs), which leads to a low bank health and low economic growth.
Therefore, banks should properly manage NPLs to a minimum level that has little or insignificant
effect on its operation.

In the normal operation, all loans granted are not fully subject to collection and free of risk. Some
portions of the loan portfolio have a probability of uncollectable and may threaten the financial
stability of the bank, which leads to increase in NPLs. Sizeable volume of NPLs signals the existence
of financial fragility and a cause of worry for banks management and regulatory authorities
(Suryanto, 2015). On the other hand, low NPLs suggest relatively a more stable financial system
Adebola, Sulaiman & Dahalon,(2011). Hence, banks need to properly follow and ensure the
collection of the funds they are granted so as not to lose their significant source of income and
maintain a stable financial position.

1
There have been so many reasons why loans fail to perform and the factors associated with NPLs of
banks are numerous and vary across countries. According to Saba, Kouser, & Azeem, (2012), the
factors associated with NPLs of banks can be broadly classified as macroeconomic and bank specific.
The macroeconomic factors are external variables that are not related to internal bank management
but reflect the economic, legal and the surrounding natural environment that can affect the loan
quality of banks in common as operating within the same economic setting. The bank specific factors
on the other hand, refer to those factors which characterized individual banks and usually associated
with the specific policy choices of a particular bank such as loan growth, performance, the quality of
the loan portfolio and operational efficiency.
In Ethiopia there are 16 private banks and 2 government banks providing loan to investors as per
National Bank of Ethiopia as of November12, 2018 nbe.gov.et. As a strategic government owned
institution, DBE is uniquely positioned in the financial industry as it is empowered to providing short,
medium and long term developmental credits loans as a package (DBE’s Loan Manual, 2014). The
Development Bank of Ethiopia is a state owned development finance institution, established in 1909
and currently the key mandate of the Bank is the provision of development credit to viable priority
area projects along with technical support and advice by mobilizing resources from domestic and
foreign sources. DBE continued to extensively provide financial and technical support to government
priority economic sectors which are lending to manufacturing, agro-processing industries, mining or
extractive industries and commercial agricultural projects constitute the major sources of its income.

The distinguished feature of DBE’s is project based lending tradition. The financed Projects are
carefully selected and prepared through appraisal, closely supervised and systematically evaluated
(DBE’s Loan Manual, 2014).
As it has been doing for over hundred years, DBE has remained dedicated to assisting the
development activities of the country through availing financial and technical assistance to viable
projects in accordance with government policies. However, availing loan to borrower is not an easy
task, this is because of the high financial risk of the bank as a result of failure to collect the disburse
loan from the customers. According to NBE directive 2008, Loans or Advances whose credit quality
has deteriorated such that full collection of principal and/or interest in accordance with the
contractual repayment terms of the loan or advances in question is called Nonperforming loan (NPL).
To achieve the objectives of circulating more and more financial resources to meet the increasing
demand for credit and to keep the Bank in sound financial position, the loans extended to various
sectors of the economy must be recovered in full. Both the principal which is used for re-lending as

2
well as the interest to meet the operating costs must be recovered. However, for the last many years
the Bank’s loan repayment performance has been very low due to various factors.

These factors may explain among others the loan repayment behavior of borrowers and
lending behavior of the Bank. This has an impact on the sustainable provision of credit to the
potential investors and existence of the bank as a financial institution (Arega et al., 2016). Knowing
these factors assisted the Bank in its continuous efforts to recover its existing loans and to set ideals
for forthcoming ones.

Non-performing loans (NPL) has attracted more attention in recent decades. Several studies examined
bank failures and find that asset quality is an indicator of insolvency (Demirguc-Kunt 1989; and
Shelagh Heffernan, 2005). Therefore; the large amount of bad loans in the banking system generally
results in a bank failure. The NPL are among the main causes of the problems of economic stagnation
(Monicah Wanjiru, 2011). Each impaired loan in the financial sector increases the possibility to lead
company to difficulty and unprofitability. The minimization of NPL is a necessary condition for
improving economic growth. When NPL retained permanently, these have an impact on the resources
that are enclosed in unprofitable areas. Thus, NPL are likely to hamper economic growth and reduce
the economic efficiency (Hou, 2007). The problem to NPL can arise from factors specific to the bank
(internal factors) or macroeconomic imbalances (external factors).

In DBE Non performing loan were reduced from 31.4% in 2004/2005 to 11.67% in 2010/11 . However,
the last five years was increased ratio of NPLs from year to year (DBE’s NPL status Reports, 2014 to
2018) As a result such figures experiencing in the bank leads to a negative impact on profitability of the
bank and even it may affects the economic growth of the country via its indirect effect through the
projects.

Thus, the present study attempts to identify the factors of NPLs of projects financed by DBE over its
years of operations. The researcher strongly believe that identifying the factors of NPLs of projects
would enable the bank’s management to tackle and minimize the problems and consequently
enhanced its loan recovery performance which is considered as a crucial factor affecting the liquidity
and profitability performance of the Bank.

1.2. Statement of the Problem

The achievement of sustainable economic growth and development of the country a competent and
well-functioning financial sector is essential. Banks exist to play a financial intermediation role by

3
mobilizing money and lending to investors while at the same time to maximizing profit. Lending is
considered the major function for existence of Commercial Banks to generate profit via providing
loans and advances to scarce area of resources (Radha, 1980)

Though, availing loan to borrower is not an easy task, this is because of the high financial risk of the
bank as a result of failure to collect the disburse loan from the customers. A sound financial system,
among other things, requires maintenance of a low level of non- performing loans which in turn
facilitates the economic development of a country (Mabw and Robert, 2010). High level of
nonperforming loan is linked with banks failures and financial crisis. Failure in one bank might lead
to run on bank which in turn has contagious impact affecting the whole banking industry (Batten and
Szilagyi, 2011).

According to NBE directive 2008, Loans or Advances whose credit quality has deteriorated such that
full collection of principal and/or interest in accordance with the contractual repayment terms of the
loan or advances in question is called Nonperforming loan (NPL). Rising trend of NPL ratio harms
asset quality of banks which eventually hindering solvency position of a bank. The main function of
banks is credit creation through mobilization of deposits. Economic growth cannot prosper without
strong financial sector (Barr and Siems, 1994). If financial soundness is week it can trim down credit
flow in country which ultimately hampers the efficiency and productivity of growing financial
institution (KiranJameel, 2014).

Credit has long been recognized as one of the important tool that supports the success of development
project which contributes towards economic development. Likewise, DBE provides sustainable credit
facility for those engaged in agriculture, industrial and other service sectors which can result in
development of the country. So, in order to maintain this objective the bank needs to strengthen its
liquidity position by enhancing its loan recovery. However, provision of credit alone does not support
the economic development of the country unless it is accompanied by the existence of factors
necessary for efficient utilization of the fund in order to repay the loan in accordance with the
agreement.

Based on strategic directions of the Ethiopian government, the objective of DBE is financing of
strategic projects to speed up the economic growth of the country while ensuring its sustainability and
financial intermediation (DBE Credit Policy, 2015). Most of projects financed by DBE have long
loan repayment periods which extend up to twenty years including maximum five years of grace
period. Moreover, low interest rate than commercial banks, which is 8.5% for priority area projects
4
and 9.5% is for non-priority area projects, and suitable rehabilitation mechanism makes the bank
unique from other commercial lending institutions in Ethiopia (DBE Loan Manual, 2014).

Accordingly, when looking at the asset quality of DBE, the data obtained from the unpublished
NPL status reports indicated that, the ratio of NPLs to total loan ratio of DBE for the last five
years was 8.37%, 12.87%, 17.82%, 24.98%, 39.43% and 36.86% for the year covering from 2014 up
to December 2019 respectively showing increased ratio of NPLs from year to year (DBE’s NPL
status Reports, 2014 to 2018) and 2019 decreased by some percent.

Table-1: NPLs ratio from 2014 up to 2019

Description Fiscal Years, Ended on June 30, … Dec.

2019
2014 2015 2016 2017 2018 Average

NPLs in Ratio 8.37% 12.87% 17.82% 24.98% 39.43% 20.69% 36.86%

Sorce:DBE five Years strategic plan (2019)

Moreover, the average NPLs ratio for the last five years was 20.69% showing a continuous declining
status. Furthermore, according to the June 30, 2018 NPL status report of DBE, the top 20 NPLs
accounts for 59.25% of the total NPLs and 23.48% of the total outstanding loans (DBE’s NPL status
Report as at June 30, 2018).This clearly indicates that there is a problem in loan repayment as it is
highly deviated from the accepted standard of 15% of the total outstanding loan.

The increasing trend of NPLs may lead to very serious implications. For instance, it discourages the
financial institution to refinance the defaulting client, which put the defaulters once again into vicious
circle of low productivity Arega A,Hanna B and Tadele T (2016). Therefore, a rough investigation of
the various aspects of loan defaults, source of credit, purpose of the loan, form of the loan, and
condition of loan provision are of utmost importance both for policy makers and the lending
institutions. Even if default is random and influenced by unpredictable behaviors or it is influenced
by certain factors in a specific situation needs an empirical investigation so that the findings can be
used by any financial institutions to manipulate their credit program for the better. Most of the default
arose from poor management procedures, loan diversion and unwillingness to repay loans, etc.
Because of this, the lenders must give various institutional methods that aimed to reduce the risk of
loan default. Ahmmed, M., Serajul,I., &Rahman, M. (2012).

5
Consequently, bank is imperative that identifying the various factors which significantly affect the
loan repayment performance from both borrowers and lender side to reduce the default rate and to
enhance the sustainability of the bank. Hence, this study aimed at identifying the factors of NPLs of
DBE. The rationale for undertaking this study is that, to the best of the researchers’ knowledge it
appears that adequate researches have not been done previously when we see the increasing amount
of NPL ratio in DBE, which makes comprehensively to assess the factors of NPLs of the bank.

This paper is different from other researchers conducted previously for instance (Mesele, 2016); it
focuses on determinants of nonperforming loans of ethiopian commercialbanks and the other scholar
is (Marta Nyalit, 2015) study area were to identify the relationship between credit monitoring and
loan default in DBE and to identify the relationship between collateralized lending and non-
performing loans.. Particularly, in Ethiopian case, the number of studies conducted on factorsof non-
performing loan so far is few in number and limited in scope, in which further study is required.
DBE is engaged in long term loans in all regions of Ethiopia. However, the study of Arega et al.
(2016) focused only on the NPLs of projects financed by DBE projects in NPLs status found at
corporate level in Head Office despite the fact that the highest share of NPLs concentrated at
corporate level. As a result, the study was not representative. In addition, the study tried to identify
the factors affecting NPLs of DBE head office using bank specific, borrowers- related variables and
the external factors that determine NPLs of DBE. However, there are so many external variables that
were not included in the study and determine NPLs of Banks. Moreover, in the recent past, the Bank
has undergone changes in its lending procedures, lending limit, credit policies and organizational
structure.

1.3. Research question

This study tried to narrow the research gaps through focusing on factors of NPLs financed by DBE
and attempted to provide answers for the following basic research questions:
1. What are Bank-specific factors of non-performing loans in Development Bank of Ethiopia?
2. What are the borrower specific factors of non-performing loans in Development Bank of
Ethiopia?
3. What are the External factors of non-performing loans in Development Bank of Ethiopia?

1.4. Research Objective(s)

The study was the following general and specific objectives.

6
1.4.1. General Objective
The main objective of the study is to identify the major factors of non-performing loan in DBE.

1.4.2. Specific Objectives

1. To assess Bank-specific factors of NPL in DBE.
2. To identify the factors of NPL occurrence in borrowers capacity of DBE.
3. To determine the External factors of NPL in DBE.

1.5. Significance of the Study

This study contributes to understanding and analysis of factors of non -performing loan and to set
effective and efficient credit management tools in DBE. The paper thus would help DBE to get
insight on what it takes to improve the loan qualities and the NBE to examine its policy in banking
supervision pertaining to ensuring asset quality banks maintain. In addition the study would also
contribute to the existing body of knowledge regarding the factorsof nonperforming loans and
motivate further research on banking context and more specifically on macroeconomic factorsof
nonperforming loan which was not cover under this research.

The study assumed significance in terms of its contribution to investigate the most crucial factors of
NPLs of DBE. In addition, the study have a lot of importance to the existing literature by providing
evidence on the factorsof impaired loans in developing countries like Ethiopia.

Apart from contributing to the literature, the paper have important practical implications for managers
in DBE. For instance, the findings may be used to develop a framework for measuring and assessing
credit risk– an important element of study for the financial stability the Bank. Finally, this study was
used as a foundation for other researchers who would like to undertake research on similar and/or
related area of study.

1.6. Scope of the study

The study covers assessment and identification of major bank specific and non-bank specific
(Borrowers related and external) causes of NPLs in DBE as a whole. Although macroeconomics
variables have a significant impact on qualities and quantities of loans, the paper is limited to bank
specific factors that determine bad loans ratio in DBE. The study also limited to DBE employees’ and
financial data of DBE. Study were undertaken in head office; this is because of the researcher
experienced that majority of credit is given at head office level because total investment costis greater
than 25 million birr and the period of the study is from 2014 upto December 2019.
7
1.7. Organization of the Study

This study organized into five chapters. Chapter one presented the introduction in which brief
introduction of topic, research problem, research questions, objective of study, and scope and
limitations of the study are addressed. Chapter two discussed literature review in which previous
theories and empirical findings regarding NPLs was explained. Chapter three explained the research
design and methodology that will be employed. Chapter four will briefly discuss the results and
findings of the study. The final chapter will present the summary, conclusions and recommendations
of the study based on the findings.

8
 Chapter Two
Review of Related Literature to factors of Non-performing loan

2.1. Introduction
This section has three parts which are the theoretical literature review, empirical literature review,
empirical review, and research gap identification so as to analyze and identify the main factors of
NPL in project finance.
2.2 Theoretical Review
2.2.1. Project definition and concepts
While there are several definitions of projects in the literature, Rondinelli, (1983) defined a project as
an organization of people dedicated to a specific purpose or objective. Projects generally involve
large, expensive, unique, or high risk undertakings which have to be completed by a certain date, for
a certain amount of money, with some expected level of performance. At a minimum, all projects
need to have well defined objectives and sufficient resources to carry out all the required tasks.
In lines of the definition provided by Pinto & Slevin (1988), and accepted for the purpose of this
research, a project can be defined as possessing the following characteristics: A defined beginning
and end (specified time to completion), A specific, preordained goal or set of goals (performance
expectations),A series of complex or interrelated activities and phases, A limited set of budget or
resources and an involvement of several people on an ad-hoc basis.
As Turner (1999), stated a project is an endeavor in which human, financial and material resources
are organized in a novel way to undertake a unique scope of work, of given specification, within
constraints of cost and time, so as to achieve beneficial change defined by quantitative objectives.
A project is a temporary endeavor undertaken to create a unique product or service. Temporary
means that every project has a definite beginning and a definite end. Unique means that the product
or service is different in some distinguishing way from all other projects or services.
Gittinger (1972) defines projects as a whole complex of activities involved in using resources to gain
benefits. He also explains that generally projects form a clear and distinct portion of a larger, less
precisely identified program. The whole program might possibly be analyzed as a single project, but
by and large it is better to keep projects rather small, close to the minimum size that is economically,
technically, and administratively feasible. If a project approaches program size, there is a danger that
high returns from one part of it was mask low returns from another. Project is an activity for which
money was spent in expectation of returns and which logically seems to lend itself to planning,

9
financing, and implementing as a unit. It is a specific activity, with a starting point and a specific
ending point, intended to accomplish specific objectives. Usually it is a unique activity noticeably
different from preceding, similar investments, and it is likely to be different from succeeding ones,
not a routine segment of ongoing operations. It was a well-defined sequence of investment and
production activities, and a specific group of benefits, that we can identify, quantify, and usually
determine a money value for. Often a project have a partially or wholly independent administrative
structure and set of accounts and funded through a specially defined financial package.
2.2.1.1 Plans and Projects
As stated by Gittinger (1972), projects provide an important means by which investment and other
development expenditures foreseen in plans can be clarified and realized. Sound development plans
require good projects, just as good projects require sound planning. The two are interdependent.
Sound planning rests on the availability of a wide range of information about existing and potential
investments and their likely effects on growth and other national objectives. It is project analysis that
provides this information, and those projects selected for implementation then become the vehicle for
using resources to create new income. Realistic planning involves knowing the amount that can be
spent on project activities for a particular kind of investment.
Well-analyzed projects often become the vehicle for obtaining outside assistance when both the
company and the external financing agency agree on a specific project activity and know the amount
of resources involved, the timing of loan disbursements, and the benefits likely to be realized. But
project analysis should not be confined to only those investments for which external financing was
sought. In the words of Gittinger (1972), if carefully designed and high-yielding projects are offset by
essentially unplanned investments, and then the net contribution to the organizational objectives is
substantially undermined.
Projects are a part of an overall development strategy and a broader planning process. Within the
broad strategy, analysts must identify potential projects that address the policy and organizational
priorities. Generally there are more than one project alternatives available with a company for
investment, of these; all the projects being prepared and analyzed should use a consistent set of
assumptions about such things as the relative scarcity of investment funds, foreign exchange, and
labor. All the project analyses should use the same assumptions about the company policies and
objectives to be reflected.
2.2.1.2 Project Life Cycle
As maintained by Prasanna C. (2002): A sequence of phases through which a project must pass.
There are a variety of definitions that generally reflect different industry practices. The generally
10
accepted sequence is: pre-feasibility (validation of concepts); feasibility (detailed investigation of
viability) design; contract (procurement); implementation; commissioning; handover and operation.
Project life cycle generally defines:
1. The tasks to be accomplished in each phase or sub- phase
2. The team responsible of each of the phases defined
As advocated by Archibald & Voropaev (2003), there is a general agreement that the four broad,
generic project phases are (common alternative terms are shown in parentheses):
1) Concept (initiation, identification, selection.)
2) Definition (feasibility, development, demonstration, design prototype, quantification.)
3) Execution (implementation, realization, production and deployment, design/construct/
commission, installation and test.)
4) Closeout (termination, including post-completion evaluation.)
The number of phases in a project life cycle depends on a variety of factors like nature of industry,
type of output, size of project etc.
Robert et al (2003) have developed a theoretical sequence of phases that may be identified with most
of the projects as is outlined below:
Project management is the application of knowledge, skills, tools, and techniques to a broad range of
activities in order to meet the requirements of a particular project. There are phases of project
management that, road map to accomplishing the project idea such as conceptual, planning, testing,
implementation or execution and closure.
It is generally better in planning projects to analyze successive increments or distinct phases of
activity; in this way the return to each relatively small increment can be judged separately. Like
products follow a product life cycle, projects follow a project life cycle that has certain phases of
development.
Dividing a big project in manageable chunks makes the complex task of managing projects easier,
these chunks in a sequential form can be termed as project phases which can further be divided into
sub-phases and a collection of these phases makes what is called as a project life cycle. Each project
phase is marked by completion of one or more deliverables. Although many project life cycles have
similar phase names with somewhat similar deliverables required, very few are identical. Most have
four or five phases, but some have nine or more. Sub-projects within projects may also have distinct
project life cycles. Importantly, these phases are not always consecutive in nature but are more
simultaneous.
2.2.1.3 Characteristics of a project life cycle.
11
According to Fikiret ,(2015), risk and uncertainty is highest at the beginning stages of a project and
reduces thereafter as the project continues. The ability of the stakeholders to influence the final
characteristics of the project’s product and the final cost of the project is highest at the start and gets
progressively lower as the project continues. Also the cost of correcting an error increases as the
project goes along.
Therefore we can summarize that projects are unique in nature and much depends on the industry,
size, location, nature, complexity, business environment etc. in which they operate. The truth appears
to be that the concept of ‘one size does not fit all’ is a good point to start with in certain cases.
2.2.2 Project financing definition and concepts
Project Finance is a financing mechanism where a firm (project sponsor) forms a separate legal
project company whose assets and cash flows are separated from the firm and provides equity and
raise non-recourse debt to carry out a specific business operation for a finite period of time. On the
other hand, the firm (non-sponsor) can finance project without legally separating it from its existing
assets, and this method of financing is called corporate finance. (Zinat, 2010).
Esty (2001) further explains the difference between Project Financed investments from corporate
financed investments as the assets are financed as stand-alone entities rather than as part of a
corporate balance sheet (Esty and Megginson, 2001). In the case of project financing, although
creditors may have partial recourse for a period of time or for a fraction of the total loan amount,
project loan by its definition is non-recourse to sponsoring organization. (Esty and Megginson,2001).
In addition to the above main difference, project finance is characterized by high investment costs
and high risks. (Neila, 2014 ).
In most of the cases, the types of financing covered by project financing is large complex and
expensive installation that might include power plants, chemical processing plants, mines,
transportation infrastructures, telecommunication infrastructures, etc (Basel, 2001).
In addition, project finance may take the form of financing of the construction of a new capital
installation or refinancing of an existing installation, with or without improvements. The borrower is
usually a special purpose entity that is not permitted to perform any function other than developing,
owning and operating the installation. The consequence is that repayment depends primarily on the
project cash flow and the collateral value of the project’s assets (Basel, 2001).
2.2.2.1 Basic Characteristics of Project Finance
Based on the review of various literatures the characteristics of project Finance is summarized as
follows; (E.R. Yascobe (2014), Enzo (2012), Basel (2001), Zinat (2010)); Capital-intensive: Project
financings tend to be large-scale projects that require a great deal of debt and equity capital, from
12
millions to billions of dollars; Highly leveraged and long term: The transactions tend to be highly
leveraged with debt accounting for usually 65% to 80% of capital in relatively normal cases. The
tenure for project financings can easily reach 15 to 20 years; Independent entity with a finite life:
contemporary project financings frequently rely on a newly established legal entity, known as the
project company, which has the sole purpose of executing the project and which has a finite life so it
cannot outlive its original purpose; Non-recourse or limited recourse financing: Since these newly
formed entities do not have their own credit or operating histories, it is necessary for lenders to focus
on the specific project’s cash flows. That is why, “the financing is not primarily dependent on the
value of the physical assets involved or collateral.” Thus, credit evaluation or investment decision
process, as opposed to corporate financing, bases mainly on the feasibility study of the project and its
sensitivity to the impact of potentially adverse factors.”; Controlled dividend policy: To support a
borrower without a credit history in highly leveraged projects, the project’s income goes to servicing
the debt, covering operating expenses and generating a return on the investors’ equity. This
arrangement usually has contractually binding; Many participants: It is not rare to find many parties
playing major roles in implementing the project. This situation requires allocation of risk through
establishing contractual arrangements like turnkey agreement between the project company and the
other participants.
Project finance is a method of raising long-term debt for major projects and lending of them relaying
on the cash flows generated by the project alone for repayment (Yescombe, 2002). The reason for
non-recourse or limited recourse financing is that in many cases the size of the project may be larger
than the size of the participating companies’ balance sheet (Fight, 2006). Project finance, therefore, is
a way of protecting the corporate balance sheet from suffering of the incremental costs of a failing
project (Esty, 2004).
This means that the failing of projects largely affects the balance sheet of financing organization than
the sponsoring companies/promoters. The financing institutions are, therefore, undertake market,
technical, financial, economic and ecological analysis in order to reduce the project failure and
increase project success (Chandra, 2002).
2.2.2.2 Bank Lending in Project Finance
In the project finance business, banks may offer two kinds of service; advisory service and financing
services. The project finance has two sources of funds; debt and equity. Debt capital is usually
provided by commercial Banks and international investment banks while equity capitals is usually
provided by project sponsors and outside equity investors. (Enzo, 2012)

13
Banks are the largest providers of debt capital in project finance and the financial structure of the
project (leverage ratio) is very important in convincing bankers to provide capital. It implies that
banks must pay particular attention to the evaluation of the credit risk of the project. Hence, the
failure of the project and the subsequent borrower’s insolvency may damage lenders heavily. (Enzo,
2012).
The assessment of economic and financial feasibility of the project made by banks should primarily
evaluate the expected economic return of the project on medium and long term, rather than focusing
on collaterals provided by sponsors or third parties. To assess the “bankability” of the project is
necessary to carry out a feasibility study. Banks have to differentiate bankable projects from non-
bankable ones. (Enzo, 2012).
Preliminary test of project practicability (viability test) is the first step for banks. A “dynamic”
analysis is necessary in funding project finance because lender’s primary security is the future
revenue stream of the project. In particular, a lender should deeply evaluate the degree of innovation
of the project, the professional skills of people who execute and manage the project, the capabilities,
competencies, and knowledge of firms involved in the project, the reaction of the target market to the
introduction of new services and products. (Enzo, 2012)
Project finance refers to the financing of long-term infrastructure, industrial or public services using
limited recourse long-term debt raised by an enterprise operating in a focused line of business in
accordance with contractual agreements. Principal and interest payments are made solely from cash
flows generated by the enterprise. Projects are usually undertaken by special purpose vehicles that
can only engage in the business of the project – the scope and duration of which is defined in the
contractual arrangements entered into by the special purpose vehicle. Projects are usually structured
with recourse to the special purpose vehicle’s assets, and with only limited recourse to the project
sponsors’ other assets which are therefore outside the scope of collateral available to secured debt
providers in the event of the failure of the project
2.2.2.3 Role of Debt in Project finance
Debt is principally repaid using cash flows generated from the operations of the project: Limited
recourse to project sponsors; Secured by the project’s assets or contracts, i.e. the power purchasing
agreement, the off-take or the asset having been created; First priority on project cash flows is given
to the Senior Lender(s); Consent of the Lender is required to disburse any surplus cash flows to
project sponsors and Riskier projects may require security/guarantees of the project sponsors.
2.2.3. Project Default /NPL/ definition and concepts

14
There is no commonly accepted definition for project failure. The definition adopted for the purpose
of this study is the operational definition by NBE Directive 2012, which defines Non-performing
Loans as loans whose credit quality has deteriorated such that full collection of principal and/ or
interest in accordance with the contractual repayment terms and conditions is not realized for more 12
(Twelve) months from the scheduled payment date or maturity.
These loans categorized under:
1. Substandard: Medium and long term loans past due 12 (Twelve) months or more, but less
than 18 (Eighteen) months.
2. Doubtful: Medium and long term loans past due 18 (Eighteen) months or more, but less than
3 (Three) years.
3. Loss: Medium and long term loans past due 3 (Three) years or more NBE directive No
SBB/52/2012 sub 7.1.3.
Different authors define project failure from different perspective and context. According to Carlos
(2002), a project is considered as failed when it has not delivered what was required, in line with
expectations.Therefore, in order to succeed, a project must deliver utilizing the minimum cost
possible, the expected quality, and on the time scheduled; and it must deliver the benefits presented in
the business case. Even if a project has delivered everything that was in the detailed project designs, it
may still be considered a failure if it did not include vital elements that the key stakeholders needed
(Carlos, 2002).According to him, project success and failure is not just about the facts, nor is it
simply about what was delivered. It is also, crucially, about how the project is perceived.
McConnell (2010) expanded the definition of project failure more than expectation. According to
him, project failure is a situation when a given project, which consumes human, material and
financial resources, fails to deliver an acceptable return on investment, so it is terminated before the
completion, no sufficient value is produced, and no benefit is delivered to the customer. The project is
considered “failed” when it does not produce results as proposed, exceeds its budget and time, and
does not meet specifications. He concludes that a project is termed as failed when it does not Meet the
following criteria: It is delivered out of schedule (time constraint); budget (cost constraint); scope
(scope constraint); and the project product does not work as expected.
The Ethiopian Foreclosure law (proclamation number 97/1998, Article 3) states that the bank
financed business can be considered as failed and foreclosed when a Bank’s claims are not paid
within the time stipulated in the contract. This definition is also contextually similar with McConnell
definition that says projects are considered as failed if not produce results as proposed or expected,
because Bank financed projects are expected to settle their debt as per loan contract agreement.
15
Similarly, the nonperforming loan directive of National Bank of Ethiopia Number SBB/48/2010
stipulates that those financed projects failed to pay the due loans for more than three years to be
classified as loss loan and obliged the bank to hold 100% provision.

DBE’s Corporate Balanced Scorecard (2010), considering the above definition of project failure in to
consideration, DBE defines successful projects to fulfill the following criteria - otherwise to be
considered as failed according to. Properly meet their debt services, Performing above their
breakeven point and Meeting their objectives by generating tax revenue to the government,
employment opportunity and generate or save foreign currency.
DBE’s definition of project success includes meeting of project objective in addition to expectation of
fulfilling debt obligation that stipulated in foreclosure law and non-performing directives since the
strategic mission of DBE goes far more than loan collection fulfilling its role as a development
partner. The success of projects financed by DBE, therefore, measured by overall contribution to the
national economic growth.

2.3 Factors of NPL

Scholars dwelling on project in general identified various causes for project failure/NPL/. Some of
the scholars’ views are as follows:

Unknowledgeable Requirements Set: (Enzo, 2012) Project failure due to poor requirements
management takes place when the project team delivers the product without having a clear
understanding of what the customer wants and without having any real knowledge of the
requirements.
Scope Creep: (Yescombe, 2002) the next of the top project failure reasons refers to a situation when
project scope does not correlate with other constraints like time and cost, and the project is likely to
be delivered over budgeted and delayed.
Absence of Change Control System: (Enzo, 2012) A change may create a new condition within your
project. If no change controls system is introduced, your team failed to respond to the new condition.
Uncontrolled changes cause project failures.
Project follow up attributes: Rondinelli, (1983) The key goal of the follow-up process is to monitor
the course of a project and adjust project activities when needed to ensure effectiveness of project
results. The project follow-up process starts with the beginning of project activities, lasts throughout
project implementation, and ends up with completion of project goals. Another name of this process
is project delivery management.
16
Policy induced variables: (Yescombe, 2002) refers to nation wise and bank level investment and
business related policies and procedures. These variables are expected to have positive and/or
negative effect on project finance performance of the bank.
Commodity nature attributes: (Yescombe, 2002) it is quite clear that risk exposure of all
commodities/products is not the same.
Source of equity contribution: Rondinelli, (1983) As it is, known Banks do not provide 100% finance
in establishing development projects. Promoters/borrowers are expected to raise some amount total
project cost.
Credit evaluation criteria: McConnell (2010) project return overestimation leads to financing of
unviable businesses in addition to shortening of payback period. Short payback period means short
repayment period since project financing solely depends on cash flow for its repayment. The
repayment over burden created because of short repayment period leads to incapability to serve the
debt commitment and project failure.
2.4 Empirical Literature

This section presents evidence which identifies the major factors of NPLs. Several researchers have
conducted a lot of study on factorsof NPLs, due to its significance for the bank’s failure. However,
the study of the factors associated with NPLs of banks varies across countries. Accordingly, the first
subsection presents factors affecting NPLs in other countries. The second subsection discusses
review of prior studies on factors of NPLs in Ethiopia and highlights the knowledge gap emerged
from survey of empirical literature.

Credit approving that has not properly considered the credit terms would potentially lead to
occurrence of loan default. As per the study by Jimenez & Saurina (2005) on the Spanish
banking sector from 1984 to 2003 NPLs are determined by lenient credit terms. The authors indicated
that the causes for the leniency were attributed to disaster myopia, herd behavior, moral hazard and
agency problems that may entice bank managers to take risk and lend excessively during boom
periods. This has been supported by Rajiv & Dhal (2003) who found that terms of credit determines
occurrence of NPLs. There are also evidences in literature about poor monitoring, on the part of the
banks, to be the main bank-specific factors behind creating NPLs. The banks carry on these practices
in order to increase profit Vatansever & Hepsen (2013).

On the other hand, banks that charge high interest rate would relatively incur a higher default rate or
NPLs. In this regard, Rajiv & Dhal (2003) who used a panel regression analysis indicated that

17
financial factors like cost of credit have got significant impact on NPLs. Bloem & Gorter (2001) also
indicated that “bad loans” may substantially rise due to abrupt changes in interest rates. The authors
discussed various international standards and practices on recognizing, valuing and subsequent
treatment of NPLs to address the issue from view point of controlling, management and reduction
measures. Similarly, a study by Espinoza & Prasad (2010) focused on macroeconomic and bank
specific factors influencing NPLs and their effects in GCC Banking System found that higher
interest rates increase NPLs but the relationship was not statistically significant.

Other studies such as Sinkey & Greenwalt (1991) indicated that loan delinquencies are associated
with rapid credit growth. The authors found that excessive lending explain loan loss rate. This was
confirmed later by Keeton (1999) who used data from commercial banks in the United States (from
1982 to 1996) using a vector auto regression model showed that there was association between
default and rapid credit growth. Likewise, Salas & Saurina (2002) in their study on Spanish banks
also revealed that credit growth is associated with NPLs. Also, study by Bercoff et al. (2002)
confirmed that asset growth explains NPLs.

Skarica (2013) also conducted a study on the factorsof NPLs in Central and Eastern European
countries. By employing the Fixed Effect Model and seven Central and Eastern European countries
for 2007-2012 periods, the study revealed that loan growth, real GDP growth rate, market interest
rate, unemployment and inflation rate as factorsof NPLs. The results show that GDP growth rate and
unemployment rate have statistically significant negative association with NPLs with justification of
rising recession and falling during expansions and growth has impact on the levels of NPLs. This
implies that economic developments have a strong impact on the financial stability. The result also
discovered that inflation has positive impact on NPLs with a justification that inflation might affect
borrowers’ debt servicing capacities. Similarly, Jimenez & Saurina (2005), provide evidence that
NPLs are determined by GDP growth, high real interest rates and lenient credit terms. Meanwhile,
Rajiv & Dhal (2003) utilize panel regression analysis and reported that favorable macroeconomic
conditions and financial factors such as maturity, cost and terms of credit, banks size, and credit
orientation impact significantly on the NPLs of commercial banks in India. Likewise, Boudriga,
Boulila & Jellouli,(2009) revealed evidence of a strong relationship between credit growth and NPLs.

Specifically, Boudriga et al. (2009) studied on the lender specific factors and the role of the business
and the institutional environment on loan default in the MENA countries for 2002 -2006 periods
using Random-effects panel regression model for 46 countries. The variables included were credit

18
growth rate, capital adequacy ratio, real GDP growth rate, ROA, the loan loss reserve to total loan
ratio, diversification, private monitoring and independence of supervision authority on NPLs. They
reported that credit growth rate was negatively related to NPLs. Capital adequacy ratio was positively
and significantly affecting loan default implying that highly capitalized banks are not under
regulatory pressures to reduce their credit risk and take more risks. In the contrary, their findings
reported that ROA has negative and statistically significant influence on NPLs.

Wanjiru (2013) also supported the above findings and concluded that the NPLs have negative
correlation with growth in loans in Kenya. On the other hand, the study of Hassan, Ilyas,& Rehman,
(2014), reveals that rapid credit growth has a significant impact on NPLs in Pakistan. The study also
claims that there are more chances of high NPLs if advancement of credit by banks is rapid. However,
using a sample of 85 banks in three countries (Italy, Greece and Spain) for the period of five years
from 2004-2008 Messai & Jouini (2013) show that, the change in lending by banks does not affect
the level of NPLs contrary to the results found by Boudriga et al. (2009).

2.4.1 Empirical Studies on Ethiopia

Wondimagegnehu (2012) in his study “Factorsof NPLs on Commercial Banks of Ethiopia” revealed
that underdeveloped 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 unexpected purposes and overdue financing has significant effect on NPLs. Conversely,
the study indicated that interest rate has no significant impact on the level of commercial banks loan
delinquencies in Ethiopia. (Arega et al., 2016)

Mitiku (2014) also studied the “Factorsof Commercial Banks Lending: Evidence from Ethiopian
Commercial Banks” using panel data of eight commercial banks in the period from 2005 to 2011 with
the objective of assessing the relationship between commercial bank lending and its factors(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 Ordinary Least Square (OLS) technique, the study found that there was significant relationship
between commercial bank lending and its size, credit risk, gross domestic product and liquidity ratio.
While interest rate, deposit, investment, and cash reserve required do not affect Ethiopian commercial
bank lending.

19
Arega et al. (2016) further conducted a study in Ethiopia using descriptive research design with the
objective of identifying the major factors affecting NPLs of DBE central region. The study result
shows that poor credit assessment and credit monitoring, credit size (includes aggressive lending,
compromised integrity in approval, rapid credit growth and bank’s great risk appetite); high
interest rate, poorly negotiated credit terms and lenient/lax credit terms, and elongated process of loan
approval were bank specific causes for the occurrence of NPLs. On the other hand, poor credit culture
of customers, lack of knowledge of borrower for the business they engaged in, willful default, loan
diversion, and project management problems were identified as the major Borrowers-related causes
of NPLs in central region.
2.4.1.1 Bank Specific Factorsof Project Loan Default

The empirical study made by Fikiret (2015) indicates the existence factors in connection with credit
origination i.e. poor due diligence assessment to know the customer and weak credit negotiation have
found to be the major determinant of loan default as per the results obtained from the survey. In
addition the interview result also affirms these facts.
Weak credit assessment made by the Bank and lack of proper skills of the loan officers were found to
be the cause of default, as per the study made by Fikirte, (2015). However, speedy loan processing
due to external pressure as a factor for loan default was not supported by the survey result.
Additionally, there is a significant relationship between over-finance and the occurrence of NPL, as
the survey result indicated. The survey result also indicates the existence of strong relationship
between poor loan monitoring and NPL. Moreover, according to the researcher the interview result
and the document study have supported such finding.
However, inadequate debt recovery regulations were not mentioned as a cause of default, as per the
study made by Fikirte (2015).
2.4.1.2 Borrower Specific factors of Project Loan Default.
Fikirte, (2015), factors in connection with the character of the borrower, the integrity of the borrower,
fund diversion and willful default as a cause of default. Selection of unsuitable and unviable schemes
and projects are found to be the cause of default. In connection with management capacity problem,
knowledge limitation of the borrower and performance of the entrepreneur as cause of loan default.
2.4.1.3 External Factors of Project Loan Default
Fikirte, (2015), data or information constraint was the major external cause of default as the survey
result indicated. Additionally, inflation and exchange rate fluctuation as significant factors for loan

20
default. However, GDP growth, lack of infrastructure and government policy had not obtained much
support by the survey result.
2.5 Summary & Research gap
Based on the above empirical studies factorsof default can be categorized as external factors of NPLs
in DBE, bank specific factors or borrower specific factors includes Diversion of loan fund and
income by borrowers, Poor credit mgt capacity of Borrowers, Willful default, Intervention of external
bodies in credit decision making, Market condition, There is a relationship between loan default and
borrower’s culture and Poor credit culture.
External factors includes Factors of Foreign currency shortage on non-performing loans, Delayed LC
openings, Currency devaluation, Unavailability of basic raw materials, Political instability, Social
conflict, Unavailability of skilled labor, Lack of basic infrastructure, Delayed project implementation
schedule and Unemployment is positively-related to NPLs.
Bank specific factorsof non-performing loan is also identified by Fikirte, (2015) as lack of proper
skill by the loan officer, speedy loan processing due to external pressure, agency problem, credit
policies, loan recovery procedures, loan appraisal process, lenient credit terms, credit growth, poor
credit assessment, aggressive lending, compromised integrity, ownership structure of the bank, bank
size and weak institutional capacity.
Borrower specific factorsof non-performing loan are identified by various studies as integrity of the
borrower, lack of technical training for loan beneficiaries, under-developed credit culture, and willful
default by the borrower, knowledge limitation of the borrower, fund diversion for unintended purpose
and misuse of loan amounts as a reason for default.
Various determinates of non-performing loans have been identified by the researchers these
determinates have been categorized under three broad categories namely external factors, bank-
specific factors and borrower’s specific factors. However, the following gap is identified in the
literatures;
Fikiret ,(2015) and Adamu, (2013) , more in specific sector, sub sector, commodity, product, private
borrowers, branch and borrower’s characteristics. But none of them assessed project follow up
attributes, policy induced aspects, commodity nature attributes, credit evaluation criteria and source
of equity contribution separately and exhaustively as this study.
Considering the above gap, this study therefore is aimed at assessing impact of project follow up
attributes, bank policy induced variables, commodity specific nature, source of equity contribution
and credit evaluation criteria factors that the researcher believes to cause NPL.

21
In view of the above discussions, numerous studies were conducted on the factorsof NPLs of Banks.
Most of these studies focused on Bank specific and Macro -economic factorsof NPL. In addition, in
the previous empirical analysis there were also study attempts that have been conducted on customer-
specific factors influencing NPLs. Besides, most of the empirical studies reviewed and discussed in
other countries. Even though, different theses have been written on the case of DBE NPLs, the studies
concentrates mainly on the bank problem they pass over the customer and external factors and also
time gap of the researchers related the factors of NPLs in the case of DBE. Therefore, this study is
expected to fill the gap by assessing the association between bank- specific, borrowers-related and
external factors of NPLs in DBE.

2.6 Conceptual Framework

The aim of this study is to identify the factorsof NPLs of DBE. Accordingly, based on the objective
of the study, the following conceptual model has been framed. NPL are affected by bank specific,
Borrowers-related and external factors as discussed in the literature review part. Bank-specific factors
include poor credit assessment and credit monitoring, credit size, aggressive lending, compromised
integrity in approving and bank’s great risk appetite, high interest rate, lenient/lax credit terms
whereas Borrower-specific causes are loan diversion, poor credit culture of borrowers, willful
defaulting (Rajiv & Dhal, 2003; Jimenez &Saurina, 2005; Joseph et al., 2012; Wondimagegnehu,
2012; Shingjergji, 2013; and Jameel, 2014;) and assuming that foreign currency shortage, delayed LC
openings for importation of machineries and equipments, currency devaluation, unavailability of
basic raw materials, social unrest, unavailability of skilled labor, lack of basic infrastructure, delayed
project implementation schedule and political instability were the macro/external factors in
determining NPL have a likely similar impact on project loans financed by DBE as it is gathered from
various projects follow-up reports of DBE. Therefore, the following conceptual model summarizes
the main focus of this study.

22
 Bank-Specific Factors
Credit assessment
Credit monitoring

Credit size of the Bank

Lenient credit terms and

conditions

High interest rate

Management Quality
Borrower-Specific Factors
Loan diversion
Poor credit culture
Non-Performing Loans
Willful defaulting

Lack of project
management
External Factors
Foreign currency
shortage
Delayed LC openings

Currency devaluation

Unavailability of basic
raw materials

Political instability

Social conflict

Unavailability of skilled
labor,

Lack of basic
infrastructure
Figure 1: Conceptual framework
Delayed project
Source: Formed by the researcher (2019)
implementation schedule

Unemployment

23
 Chapter Three
Research Methodology

3.1. Introduction
This section describes the type of research, how the research work is designed and the methods that
the study intends to employ in carrying out the research undertaking.
3.2. Research Design and Approach
3.2.1. Research Design
To achieve the objective of the study, the research was employed descriptive research design to
identify the factorsof NPLs in DBE. Research design is the conceptual structure within which research
was conducted; it constitutes the blueprint for the collection, measurement and analysis of data (Kothari,
1990). Depending on the way in which researchers ask their research questions and present their purpose,
the research design could be classified into two groups, namely exploratory and descriptive studies
(Saunders et al., 2009).
Exploratory study is performed when the researcher has little information or when the research problem is
badly understood (Hair et al., 2011) and (Ghuari & Gronhaug, 2005).It is particularly useful to clarify the
understanding of a problem, such as if you are unsure of the precise nature of the problem (Saunders et
al., 2009).
Descriptive studies are designed to obtain data that describe the characteristics of the topic of interest in
the research (Hair et al., 2011). In descriptive research, the research problem is structured and well
understood (Ghuari & Gronhaug, 2005). Comparing with exploratory study, descriptive study would give
the readers reasonable answer addressed to the research question. In other words, it is used for testing
hypothesis (Hair et al., 2011).

3.2.2. Research Approach

The approach intends to adopt in the study contains diverse methods and tools that are relevant to
achieve the desired research outcome. Accordingly, the research strategy this study intends to employ
was quantitative.

Quantitative approach is study in order to provide a broader and more complete vision of a problem.
Quantitative methodology is employed when both comparative analysis and the development of aspects of
the study need to be undertaken comprehensively and in depth. The use of Quantitative method turns
possible to overcome the limitations of quantitative method, allowing the researcher to get rich
information that could not be obtained using each method alone. However, the number of published

24
scientific studies addressing the use of quantitative method is limited, and most of them focus on
describing an implementation approach without giving a global and comparative overview of the various
approaches. In this sense, this study tries to synthesize and describe the quantitative method, also
providing indications about the advantages and limitations of each of these approaches (Fernando et al.,
2018).

3.3. Population and Sample

3.3.1. Target Population
The participants (subjects) of the study projected administered under corporate units of DBE in NPLs
status as at June 30, 2019. Based on NBE’s directive, the repayment performance of the project can
only be evaluated after six months and above (NBE Directive, 2012). As a result, in sample size
determination, projects administered at corporate level which are under implementation were not part
of the study. Moreover, project administered under corporate units of DBE which are under ageing
categories of pass and special mentions (since they are considered as performing loans) are not part of
the study.

The NPLs status report of DBE as at June 30, 2019 indicated that there were 118 numbers of NPLs
managed in corporate units. Sample selection based on stratified random sampling. Considering the
total population of the study, the sample size of the study determined using mathematical formula.
Accordingly, based on NBE asset classification and provisioning directive no. SBB.52/2012 of loan
classification, borrowers sample size taken only from default loans (NPLs) which are under loan
classification of substandard, doubtful and loss. However, the sample for staff respondents will be
taken from corporate work units of DBE who administer such loans (projects). Accordingly, staff
respondents was selected from Customer Relationship Management Directorates (CRMDs) and
Project Rehabilitation and Loan Recovery Directorates (PRLRDs) in DBE. Therefore, the target
population for this research was comprise all clerical permanent employees (including both
management and non-management staffs) of loans (projects), who are working in the directorate.
According to the data obtained from employee data base, as of December, 2019 the directorates have
a total of 264 employees in those three directorates. However, out of the total employees 240 fall in
clerical category, which the researcher consided as the target population for the study. The following
table presents the proportion of the three directorate’s employees.

25
Table 2: Distribution of DBE Staffs by Directorates
Work Units Population Size Proportion
CRMDs 130 54%
PRLRs 30 13%
PAD 80 33%
Total 240 100%
Source: Corporate work units of DBE Administer loans (projects) Employee Database (2019).

3.3.2 Sources and tools of data collection

Accordingly, the study used both primary and secondary sources of data. A primary source of data is
prefer as per the nature of the variables, the study need to have the raw data to have understanding on
the perception of the designated party’s on the research area. A secondary source of data may
preferred by the study since it is less expensive in terms of time. Secondary data is either being
published or unpublished data (Kothari, 2004). Accordingly, primary data is obtained by in depth
semi structured interview with the responsible parties; the persons selected from the credit process.
Secondary data is obtained from the audited annual financial statements of the DBE.

The study used data obtain from primary data which consists of questionnaire with bank credit process
staffs to identify the reason behind such high loan default. The questionnaire is composed of
structured questions and questions. Moreover, secondary data sources such as DBE annual report,
brushers and DBE portfolio report used to overview the DBE performance during the previous years.
The questioners were administered only to employees in Head office because it was difficult to
administer for employees all over the branch in DBE. Besides, the researcher believed that at least
including Addis branch in the sample frame makes the results of the research more trustable and
acceptable.

3.4. Data Analysis

After the data collected from primary data collection through questionnaire, the researcher analyzed
the results based on their nature and type accordingly.

The study was employed quantitative analysis method. The quantitative analysis of the study was
employ descriptive statistics. The data analyzed using Statistical Package for Social Sciences (SPSS
version 21). To find the factors we use descriptive anlysis methods. Besides, measures based on
Median, frequency and percentage used to analyze the data gathered through the questionnaire.
Content analysis used for the document data and finally these findings corroborated.

26
Descriptive statistics such as frequencies, mean, median, mode, minimum and maximum Values, and
standard deviations as measures of central tendencies and dispersion was produce.

3.5. Descriptive Analysis

The researcher analyzed the result of quantitative data with descriptive approach to describe the
values of the scores of the responses of the respondents’ level of agreement and disagreement with a
given statement under each type of questions.

3.6. Quantitative data analysis

The use of quantitative strategy of inquiry is necessary when the researcher want to deeply investigate
and analyze an event, program and problem very well (Creswell, 2003).

The quantitative aspect of this study has a purpose to seek information that can be generalized about
the factors of NPLs in DBE. The study determinations based on survey design with structured self-
administered questionnaire and document analysis.

3.7. Nature of Data and Instruments of Data Collection

The study employed primary data. In the context of DBE, a loan is said to be NPL when it fails to
meet its debt obligations and past due over 365 days. Based on NBE asset classification and
provisioning directive no. SBB/52/212, the status loans can be classified into five ageing categories.
Namely, Pass, Special mention, Substandard, Doubtful and Loss. The first two are categorized under
performing loan and the rest three are categorized under NPLs. Accordingly, the data for the study
was collected only from DBE financed projects that are under the categories of non-performing that
includes substandard, doubtful and loss ageing categories.

In order to collect primary data, the researcher used questionnaire. Questionnaire dispatched both to
the borrowers and the staffs of the Bank to identify the major bank-specific and borrowers-related
factorsof NPLs. As far as the primary data is concerned, project follow-ups reports of different
projects financed by DBE reviewed and the annual NPLs status reports of the bank and credit policy
and procedures employed in the study.

3.7.1. Sample Selection

The NPLs status report of DBE as at June 30, 2019 indicated that there were 118 numbers of NPLs
managed in corporate units. Sample selection based on stratified random sampling. Considering the
total population of the study, the sample size of the study determined using mathematical formula.
27
Accordingly, based on NBE asset classification and provisioning directive no. SBB.52/2012 of loan
classification, borrowers sample size taken only from default loans (NPLs) which are under loan
classification of substandard, doubtful and loss. However, the sample for staff respondents was
taken from corporate work units of DBE who administer such loans (projects). Accordingly, staff
respondents selected from Customer Relationship Management Directorates (CRMDs) and Project
Rehabilitation and Loan Recovery Directorates (PRLRDs) in DBE.

3.7.2. Sample Size Determination

For the purpose of the study the sample size with a 95% confidence level is determined by a formula
as suggested by Yamane (as cited in Isaack & Dinah, 2016):

= where; n is Sample Size, N is Population size and e the level of precision.

, Therefore, the approximate sample size is equal to 150 staffs in DBE

3.7.3. Sampling Design

Because of time and budget constraint the study was not employ all the target population of the study.
Thus, to achieve the study purpose, a combination of both probability sampling design was chosen to
select a representative sample from employees of DBE.

3.7.4. Sampling Techniques and Procedures

The sample size for data collection was done using proportional quota sampling technique by taking a
proportional sample of employees who work in each directorate. Then, the task of selecting sample
respondents was done using a lottery system of simple random sampling technique from staffs of
each directorate to ensure that each element in the population have an equal chance of being included
in the sample. Hence, the proportional sample size of the study described in the following table.

Table 3: Proportional Sample Size for the Study

28
Work Units Sample Proportion * Sample size Sample Size
CRMDs 54%*150 81
PRLRs 13%*150 20
PAD 33%*150 49
Total 100% 150
Source: Researcher own computation (2019).

3.8. Data Processing and Analysis

3.8.1. Data Processing

As data processing is the critical part of any research regardless of its type, great care and effort was
invested by the researcher to the maximum possible extent. In the process, the collected quantitative
data values was edited, coded and enter to Statistical Package for Social Sciences (SPSS) software for
further analysis.

3.9. Ethical Consideration

The research gave due consideration to obtain consent from each participant of the study and it was
strictly conducted on voluntary basis. The researcher was also trying to respect right and privacy of
the participants for the study. The researcher would like to assure that the findings of the research
presented without any deviation from the outcome of the research. In addition, the researchers gave
full acknowledgements to all the reference materials used for the study using the APA referencing
style.

29
 Chapter Four
Data Presentation, Analysis and Interpretation
4.1. Introduction
This chapter is organized into four sections; in the first section, the general information of the
respondents obtained from the survey are presented and analyzed. The second part is present factors
of nonperforming loans occurrence in relation to diversion and borrowers capacity. The third part is
considered the factors of nonperforming loans occurrence in relation to bank specific factor. The
fourth section is the factors for nonperforming loans in relation to external factors perspective.

The data gathering instruments used was questioner survey. The questionnaire is distributed to all of 150
credit performers of DBE, but only 119 have completed and returned successfully. Hence around 79.3%
of the distributed survey is collected.

4.2. General information of Respondents

Table 4: Relation of the respondents’ age and business sector

Age * Business sector Cross tabulation

Business sector Total
Agriculture Manufacturing Mining & Service
Energy
Age 26-30 2 3 1 1 7
31-40 2 6 1 1 10
41-45 7 11 3 1 22
>45 10 32 5 4 51
Total 21 52 10 7 90

From the above table 4.In line with the data collected and result obtained, out of the total borrower,
the higher number of respondents was in the range of greater than 45 years, which represent 56.7%,
followed by age groups of 41-45 years and 24.4% the remaining `18.9 percent respondents are in age
group of 26-40. This infers that most of the respondents were found in age range of greater than 45.

Table 5:Customers’ educational level and Gender

30
 Gender * Educational Level Cross tabulation
Educational Level Total
Diploma or other 1st 2nd
Certifications Degree Degree
Gender Male 25 25 5 55
Female 10 17 8 35
Total 35 42 13 90

From the above table 5,In relation to the respondent gender and educational level, 55 (61.1%) were
male which education level are 25 of them have a diploma or other certification, 25 of the male
respondents have 1st degree and five of them graduate with a 2 nd degree. Besides this 35 (38.9%) of
the respondents are female and from this total ten of the respondents have diploma or other
certification and 17 respondents are 1st degree holder and the remaining eight respondent is 2 nd degree
holder.
Table 6: Number of years as a bank Borrower
Frequency Percent
Valid 6-10 39 43.3
11-15 31 34.4
16-20 5 5.5
Total 75 83.3
Missing System 15 16.7
Total 90 100.0

Table 6 specifies that regarding the number of years as a bank customer it can be deduced from the
table below 39 (43.3%) have 6-10 years relation with the bank, 31 (34.4%) have 11-15 years working
relation with the bank and 5 (5.5%) have a working relationship of 16-20 years while 15 (16.7%) or
the respondents doesn’t specify their answer. From the table below 40% of the respondents do have
enough work relation with the bank. Because of this it can indication loans become nonperforming at
the early stage of disbursement?

Hence from the results of the survey regarding demographic characteristics of borrowers, the majority
of default borrowers are working in the manufacturing sector and fond in the age range of more than
45 years. This infers that, From those who are work in manufacturing sector most defaulters were
male, have a 1st degree and have a working relationship with the bank in a range of 6-10 years.
Table7:Employee job position and age
Position in DBE * Age Cross tabulation

31
 Age Total
21-30 31-40 41-50
Position in Loan officer/Sr. 39 30 0 69
DBE Appraisal officer/Sr. 16 3 3 22
Rehabilitation officer 9 3 0 12
Credit team Manager 0 4 4 8
Appraisal team Manager 3 3 0 6
Other 2 0 0 2
Total 73 43 3 119
From the above table 7 shows the current job position and age of staff respondents. Sixty Nine of the
respondents were Loan Officer and Senior Officer almost all of these respondents’ age group falls
between 21 and 30. There are 22 Appraisal officers’ respondents and 16 of these respondents age fall
between 21 and 30. There are 12 Rehabilitation officers’ respondents and 9 of these respondents age
fall between 21 and 30 .As to Credit team Manager there are 8 respondents and 4 of them are in the
age group of 31-40 and 41- 50.As to Appraisal team manager there are 6 respondents and 3 of them
are in age 21-30 and 3 of them are in the age of 31-40. Whereas, there were four management staff
respondents (eight from Credit Team Leader and six from Appraisal Team) seven of the respondents
found in age group between 31 and 40, four of them are found in the age group of 41-50 and the
remaining three are between 21- 31. Hence, the survey result clearly indicates that most of the staff
members included in the study were Senior Loan Officers that are found in age group of 21-40 which
are capable of providing reliable data necessary for the study.
Table 8: Employee years of service and gender
Sex * Work experience in DBE Cross tabulation
Work experience in DBE Total
1-5 6-10 11-15
Sex Male 46 20 26 92
Female 17 6 4 27
Total 63 26 30 119

The above table 8 specifice that in terms of staff respondents’ gender, there are 92 male and 27
female. In accordance with this, most female respondents have maximum of 5 years experience in the
bank. Regarding the male respondents 46 of them have working experience of 1 – 5 years.20 male
respondents had banking experience of 6-10 years; and 26 male staff respondents were having 11-15
years of banking experience. This infers that the majorities of DBE staff respondents were male and
have ample experience in providing the desired response that naturally contributed to the data quality
of this survey.

32
4.3. Bank Specific Factors
The study tries to examine bank factors that affect nonperforming loan in DBE. The study asked
respondents to show their level of agreement or disagreement to certain statements dealing with bank
specific factors affecting occurrences of nonperforming loans. Hence, the responses given by the
bank staff respondents are presented as follows.
4.3.1. Credit Assessment and NPLs
Table 9 Relation between Credit Assessment and Loan Default

Some
Strongly Some what Strongly
Agree Agree what Agree Disagree Disagree Disagree
  No. % No. % No. % No. % No. % No. %
Factors of NPLs are obvious
in DBE. 10 8.4 50 42.0 24 20.2 24 20.2 5 4.2 6 5.0
Customer Due Diligence
(CDD) policy of Banks lead
to high loans quality 18 15.1 48 40.3 14 11.8 27 22.7 6 5.0 6 5.0
Poor credit risk assessment
would lead to loan default 10 8.4 50 42.0 24 20.2 24 20.2 5 4.2 6 5.0
The banks credit assessment
would lead to loan default 8 6.7 38 31.9 13 10.9 37 31.1 20 16.8 3 2.5
DBE’s project appraisal and
evaluation parameters are not
good to provide achievement
of project realization 15 12.6 37 31.1 24 20.2 28 23.5 13 10.9 2 1.7
The bank financial projection
s are exaggerated 9 7.6 28 23.5 27 22.7 34 28.6 19 16.0 2 1.7
Total Number = 119 Frequency =100%

As shown in the above table 9, The result indicates the results below 42% of the respondents agreed
that factors of nonperforming loans (NPL) are obvious, 48% of the respondents agreed that customer
due diligence (CDD) policy of bank leads to high loan quality. The study also indicated that poor
credit risk assessment would lead to loan default as evidenced by above average number 42% of
respondents. The bank credit assessment procedure leads to loan default 31.9% of the respondents
agree. The bank’s project appraisal and evaluation parameters are not in a very genuine and good
manner to provide achievement of project realization from these the major respondents 31% agreed.
On the other hand, 23.5% of the respondents having agreed that the bank financial projections are
exaggerated but 28.6% somewhat disagree.

33
 From the above result respondents agree customer due diligence, poor credit risk assessment, and
credit assessment procedure leads to loan default, evaluation and parameters are not good and the
bank financial projections are exaggerated all the credit assessment mention above can improve the
loan quality in the bank. In contrast, with this if customer due diligence and credit assessment have
low standard the possibility to be NPLs is high. This infers that, respondents disagree “the bank
financial projections are exaggerated” as the cause of nonperforming loan.

4.3.2. Credit Monitoring and NPLs

The table below shows that strict monitoring and controlling of project performance is believed to
lead to high loan quality as confirmed by a significant number of 55 (46.2%) respondents. On the
other hand, 50 (42%) of the respondents with agreed that loan might perform well if properly
monitored despite poor loan follow up and monitoring contributes for increment of nonperformance
loans. Nevertheless, 26.9% with the number of 32 respondents agreed that the bank credit monitoring
system control over the entire process of lending related to loan follow up. Moreover, 25.2% of the
respondents agreed that the monitoring reports produced by the bank do not enable the bank’s top
management pass informed decision. Naturally, the objective of monitoring a loan is to verify
whether the basis on which the lending decision was taken continuously to hold good and to ascertain
the loan funds are being properly use for the purpose they were granted. There is also a tendency by
borrowers to give more attention to repaying loans if they are properly given attention by banks.
Thus, credit monitoring is directly related to loan performance. Strict monitoring and controlling of
projects is the base to have good loan quality. Moreover, even poorly assessed and advanced loan
might perform well if properly monitored. This indicates that follow up would substitute poor credit
analysis or assessment at the beginning. On the other hand, though loan monitoring requires a budget,
allocating higher budget might ensure loan performance.
Table 10:Credit Monitoring and Loan Default

Strongly Somewhat Somewhat Strongly

Agree Agree Agree Disagree Disagree Disagree

  No. % No. % No. % No. % No. % No. %

Monitoring in the bank loans ensures
improved loan performance 19 16.0 55 46.2 17 14.3 14 11.8 11 9.2 3 2.5

Poor loan follow up and monitoring contrib
utes for increment of nonperforming loans. 24 20.2 50 42.0 13 10.9 21 17.6 11 9.2 - -

34
 DBE credit controlling system control over 13.
the entire process of lending. 10 8.4 32 26.9 21 17.6 37 31.1 16 4 3 2.5
The monitoring/follow up reports produced 
by the bank did not enable the top
management pass informed decision. 9 7.6 30 25.2 20 16.8 42 35.3 9 7.6 9 7.6
Total Number = 119 Frequency =100%

4.3.3. Credit Size and NPLs

Table 11 below summarizes the impact of credit size on nonperforming loans from the credit experts’
perspective. The findings revealed that slightly below average 30.3% of the respondents agreed that
rapid growth results in higher levels of NPLs ratio. In the case of the reasons for bank’s high NPLs is
its nature of concentrating on mega projects, 18.5% of the respondents agreed, but with significance
number 42 (35.3%) respondents somewhat disagree. From the observed population, 31.1% of the
respondents agreed the reason for bank’s great risk appetite would be cause for occurrence of non-
performing loans. Finally, 85.1% percent of them disagreed that having a large number of borrowers
causes loan default.
Hence, rapid credit growth and great risk appetite cause a large volume of nonperforming loans.
Besides, the bank’s leading is concentrated on mega projects are also believed to cause for the
occurrence of loan default as confirmed by a significant number of respondent. The response
indicates that nature of concentrated on mega projects is not the cause of the occurrence loan default
as evidenced by the majority of respondents.

Table 11:Credit Size and Loan Default

Strongly Somewhat Somewhat Strongly

  Agree Agree Agree Disagree Disagree Disagree
No
  No. % No. % No. % No. % . % No. %
Rapid credit growth results in
higher levels of NPLs 2 1.7 36 30.3 32 26.9 26 21.8 7 5.9 16 13.4
The reason for bank’s high NPLs is
it nature of concentrating in mega
2 1.7 22 18.5 19 16.0 42 35.3 21 17.6 13 10.9
projects
Bank’s great risk appetite is cause 17 14.3 37 31.1 17 14.3 26 21.8 5 4.2 17 14.3
35
for NPL
Total Number =119 Frequency = 100%

4.3.4. Credit terms and conditions

Table 12 shows response’s on factors indicating the relation between credit terms & conditions and
occurrence of the nonperforming loans. For the question of the bank credit policy and procedure are
lenient the respondents agree by 43.7%. This implies the bank has no problem concerning credit
policy and procedure. However, 56.3 % of the respondent agrees lenient term can be a cause of
nonperforming loan. On the other hand, 41.2% of the respondent agreed the bank policy defines its
priorities, clarify the way it manages credit risk. In addition to this 34.5% of respondent’s consider
priority areas of the bank are investigated and selected carefully.
Hence, according to the data collected the bank policy and procedure are the cause for NPLs. The
policy definition priority and select them in carefully, clarify the way it manages credit risk, enhance
accountability and responsibility in credit provision process. However, there are lenient terms that
may be a cause of nonperforming loans.

Table 12:Credit terms and conditions and Loan Default

Strongly Somewhat Somewhat Strongly

Agree Agree Agree Disagree Disagree Disagree
  No. % No. % No. % No. % No. % No. %
The bank credit policy and
procedure are lenient 12 10.1 40 33.6 20 16.8 26 21.8 15 12.6 6 5.0
Lenient/lax credit term cause
loan default 8 6.7 59 49.6 11 9.2 25 21.0 7 5.9 9 7.6
The bank policy defines its
priorities; clarify the way it
manages credit risk; enhance 7 5.9 42 35.3 30 25.2 15 12.6 14 11.8 11 9.2
36
accountability and responsibi
lity in its credit provision
process.
Priority areas of the bank are
investigated and selected car
efully 7 5.9 34 28.6 32 26.9 19 16.0 10 8.4 17 14.3

Total Number = 119 Frequency = 100%

4.3.5. Interest rate and NPLs

Regarding credit performers’ capability, power and bank policy and its impact on the occurrence of
NPL in the bank 53.7% of the respondents agreed that project appraising and selection officers and
managers are qualified and skilled enough. Furthermore, more than half of the respondents 61.1%
disagreed that credit performers in the bank have autonomous power in appraising and selecting
projects. Finally, 55.6% of the respondents agreed that measures taken to resolve non-performing
loans in the bank are too lenient. Hence, the study indicates even though the bank employees’ are
skilled enough they don’t have full authority to exercise their knowledge. Furthermore, the bank
action toward NPLs is lenient.
4.3.6. Relation between Interest rate and nonperforming loans
With regard to the relation between interest rate and occurrence of nonperforming loans, only 4.2 and
8.4 percent of respondents strongly agree and agree respectively with statement that high interest rate
related to other bank and on the other hand majority of the respondents with 40.3 percent and 19.3
percent disagree respectively the statement that high interest rate related to other bank and also 23.5
percent and 13.4 present of the respondent disagree and strongly disagree respectively the statement
that commitment interest rate due before disbursement. Thus, from the result we can conclude that
when loans are collateralized the probability of unpaid of the loan is very high.
Table 13:Interest rate and NPLs
Strongly Somewhat Somewhat Strongly
Agree Agree Agree Disagree Disagree Disagree
No. % No. % No. % No. % No. % No. %
High interest rate related 5 4.2 10 8.4 12 10.1 21 17.6 48 40.3 23 19.3
to other Bank
Commitment interest rate  4 3.4 20 16.8 29 24.4 22 18.5 28 23.5 16 13.4
due before disbursement
Total Number = 119 Frequency = 100%

4.3.7. Management Quality and NPLs

Regarding credit management quality and its impact on the occurrence of NPL in the bank 29.4% and
10.15% of the respondents disagreed and strongly disagree respectively that Lack of experience employee

37
on credit. Furthermore, the respondents 22.7% and 12.6% strongly agree and agree respectively with the
credit performers in the bank have lack of training. Hence, the study indicates even though the bank
employees’ on credit have experienced enough but they don’t have enough training to exercise their
knowledge.

Table 14:Management Quality and NPLs

Somewhat Somewhat Strongly
Strongly
Agree Disagree Disagree Disagree
Agree Agree
No. % No. % No. % No. % No. % No. %
Lack of experience 2 1.7 25 21.0 28 23.5 17 14.3 35 29.4 12 10.1
 employee on credit
Lack of training 15 12.6 27 22.7 31 26.1 20 16.8 17 14.3 9 7.6
Total Number = 119 Frequency = 100%

4.4. Borrower Specific Factors

4.4.1 Loan diversion

The respondents’ were asked about the diversion of loan fund and income by borrowers and loan
default. Accordingly, 44.4% of the respondents agreed that diversion of loan fund and income. Thus,
the result shows that fund and income were the cause of the loan default. In another context, the
respondents’ states that loan divert by the current situation or market condition to repay their loan on
time.

Table 15:Diversion of loan fund and income by borrowers and loan default
Loan diversion
Frequency Percent Cumulative Percent

Valid Strongly Agree 22 24.4 24.4

Agree 40 44.4 44.4
Somewhat Agree 21 23.3 23.3
somewhat Disagree 4 4,44 4.44
Strongly Disagree 3 2.5 100.0
Total 90 100.0

38
 4.4.2. Poor credit management
Regarding poor credit management and its impact on the occurrence of NPL in the bank 35.6% and 10% of
the respondents disagreed and strongly disagree respectively about the poor credit management of
borrower. Furthermore, the respondents 33.3% that credit managed. Hence, the study indicates even
though the bank customers on credit have experienced enough.

Table 16:Poor credit management capacity of Borrowers

Poor credit management
Frequency Percent Cumulative Percent

Valid Strongly Agree 7 7.8 7.8

Agree 30 33.3 41.1
Somewhat Agree 12 13.3 54.4
Somewhat Disagree 9 10.0 64.4
Disagree 32 35.6 100.0
Total 90 100.0
4.4.3. Willful default
Table 17:Willful default approved
Willful default
Frequency Percent Cumulative Percent

Valid Strongly Agree 7 7.8 7.8

Agree 25 27.8 35.6
Somewhat Agree 8 8.9 44.9
Somewhat Disagree 15 16.7 61,2
Disagree 35 38.8 100.0
Total 90 100.0

In another question, respondents were asked about willful loan default. Accordingly, the 38.8 percent
of them disagree willful default that the loan approved by the bank was insufficient for the
requirement of the project.

4.4.4. Intervention of external bodies in credit decision making

Table 18:Intervention of external bodies in credit decision making and loan default
External intervention
Frequency Percent Cumulative Percent

Valid Strongly Agree 7 7.8 7.8

39
 Agree 21 23.3 31.1
Somewhat Agree 5 5.6 36.7
Somewhat Disagree 7 7.8 44.5
Disagree 50 55.6 100.0
Total 90 100.0
In addition to the above issue, which is Intervention of external bodies in credit decision making, 55.6
percent of the respondents disagree by the external bodies’ intervention.

4.4.5. Market Condition

When we look at the market condition of the borrowers in the table 17 below, about majority of the
respondents evaluated their market demand was good. Aside from this, 43.3% of the respondents
agreed that their market situation was as expected or projected by the feasibility study. However,
31.4% of the respondents disclosed that their market situation was not as per the expectation or
projection made by the feasibility study. The reason for the market situation not at the level of their
expectation or projection was that because they were producing below their capacity as indicated of
the respondents. The other reasons mentioned were excess supply in the market. In addition, the
respondents listed the following reasons for the market situation not as per expected or projected on
the feasibility study:this indicates that, Lack of experience in marketing, Implementation of
inappropriate marketing strategy, Overestimation problem while developing the feasibility study,
Unavailability of raw materials in the local market and insufficiency of fund allocated for working
capital and inaccessibility of foreign currency.

Table 19:Market condition and loan default

Market condition
Frequency Percent Cumulative Percent
Valid Strongly Agree 11 12.2 12.2
Agree 39 43.3 55.5
Somewhat Agree 20 22.2 77.7
Somewhat Disagree 10 11.1 88.8
Disagree 5 5.6 94.4
Strongly Disagree 5 5.6 100.0
Total 90 100.0

40
4.4.6. Borrower credit culture
Borrowers were asked to give their degree of agreement or disagreement whether or not the credit
culture. In the table 19 below, only 36.7% of the respondents agreed that the process is transparent.
Though, 21.1% of them are somewhat disagree and disagree to provide their view on the matter
claimed that the process of approving loans in the bank is not transparent.
This infers that,almost half of the respondents have a credit culture of the bank. Besides, the credit
culture of the bank has cause for nonperforming loans. The reason might relate to the transparency of
loan approving. If the loan approval process is not transparent it highly deteriorates the quality of loan
approved.
Table 20:Relationship between loan default and borrower's culture
Relationship between loan default and borrower's culture
Frequency Percent Cumulative Percent
Valid Strongly Agree 6 6.7 6.7
Agree 33 36.7 43.4
Somewhat Agree 20 22.2 65.6
Somewhat Disagree 12 13.3 78.9
Disagree 10 11.1 90.0
Strongly Disagree 9 10.0 100.0
Total 90 100.0

4.5. External Specific Factor

The respondents were asked to rank the external factor for determining NPLs from a given list.
Accordingly, Foreign currency shortage and delayed project implementation schedule was considered
by the majority as the primary external factor causing occurrences of nonperforming loans while
delayed LC opening was considered second. Political instability was the third influential factor by the
respondents. On the other hand, a lack of basic infrastructure was marked by 36 respond ants as the
fourth important external factor to cause the occurrence of nonperforming loans. 31 respondents were
considered currency devaluation as the fifth external factor. Whereas, unavailability of basic raw
materials marked by 28 respondents as an important external factor. Finally, social unrest and
unavailability of skilled labor have been marked as the seventh and eighth influential factor to cause
for loan default.
4.5.1. External Factors and nonperforming loans
The table 19 below shows responses on factors indicating the relation between external factors and
occurrence of the nonperforming loans. 31.9 percent and 37.8 percent of the respondents strongly
agree and agree respectively those factors of foreign currency shortage on nonperforming loans. On

41
 the other hand 28.6 and 52.9 percent of the respondents strongly agree and agree respectively that
having delayed of LC openings. With regard to currency devaluation, 21.0 and 47.1 Percent of the
respondents strongly agree and agree respectively that it ensures loan performance. Unavailability of
basic raw materials by 68.1 percent of the respondents (sum of agree and strongly agree). Almost
74.8 percents of them strongly agreed and agree by the sum to assertion that political instability of
large magnitude of nonperforming loans.12.6 and 48.7 percent of the respondents strongly agree and
agree thought social conflict would be cause for occurrence of nonperforming loans. The response on
the relation between unavailability of skilled labor and NPL reveals that almost 26.1 percent are in
agree while 27.7 percent of the respondents are somewhat disagree. Strict loan monitoring is believed
to ensure loan performance by 97.56 percent of the respondents. 45.4 percent of the respondents
agree with the lack of basic infrastructure assertion related with non performing loans. 29.9 and 46.2
percent of the respondents strongly agree and agree respectively that occurrence of nonperforming
loan is directly related delayed of project implementation. On the other hand 10.9 and 31.1 percent of
the respondents strongly agree and agree respectively that unemployment is positively related to
nonperforming loans. This indicates that from the respondents non performing loans have external
factors follow-up can never substitute proper credit assessment.
This infers that the variables related to external factors and thereby the factors for nonperforming
loans in relation to external factors might heap up large volume. Not only this but also external
factors in sanctioning credit is also believed to be cause for occurrence of nonperforming loans
default by respondents. Based on the survey response of external factors and non performing loans
have positive relationship.

Table 20:External factors and non performance loan in DBE

Strongly
Strongly Somewhat Somewhat Disagree Disagree
Agree Agree Agree Disagree
No
. % No. % No. % No. % No. % No. %
Factors of foreign currency 38 31.9 45 37.8 15 12.6 5 4.2 13 10.9 3 2.5
shortage on non-performing
loans
Delayed LC openings 34 28.6 63 52.9 8 6.7 2 1.7 6 5.0 6 5.0

Currency devaluation 25 21.0 56 47.1 13 10.9 9 7.6 13 10.9 3 2.5

42
 Unavailability of basic raw 12 10.1 69 58.0 15 12.6 9 7.6 9 7.6 5 4.2
Materials
Political instability 20 16.8 69 58.0 11 9.2 8 6.7 8 6.7 3 2.5

Social conflict 15 12.6 58 48.7 24 20.2 9 7.6 7 5.9 6 5.0

Unavailability of skilled labor 3 2.5 31 26.1 25 21.0 33 27.7 17 14.3 10 8.4

Lack of basic infrastructur 5 4.2 54 45.4 22 18.5 17 14.3 5 4.2 16 13.4

e
Delayed project implemen 32 26.9 55 46.2 8 6.7 12 10.1 6 5.0 6 5.0
tation
Unemployment is positive 13 10.9 37 31.1 20 16.8 18 15.1 13 10.9 18 15.1
ly related to NPL
Total Number = 119 Frequency = 100%

Chapter Five
Summary of Findings, Conclusions and Recommendations
5.1. Introduction

The preceding chapter presented results and discussion of the study, while this chapter will deal with
the conclusion and recommendation of the study based on the findings. Accordingly, this chapter is
organized into three sub-sections. Section 5.2 will be presented summary of the paper. The
conclusion of the study and recommendation of the study will be presented under section5.2.
5.2. Summary
43
The purpose of this study was to empirically examine factors of non-performing loans in DBE and
identify major bank specific borrower specific factor and external factors of non-performing loan in
DBE. The data for the study was collected from primary data. Primary data was collected using
structured questionnaires from the sample. A probablity sampling technique was used to select the
sample.Examining the factors of nonperforming loan in DBE is the major objective of the paper. In
this study, descriptive analysis has been to found out factors affecting NPL of DBE. The study
conducted survey of Banks’ employees and borrower using questionnaires.
5.3. Conclusion
In a question where the respondents were requested to rate factors they believed cause occurrences of
nonperforming loans in order of importance; Diversion of loan and income by borrowers, Poor credit
management capacity of Borrowers, Willful default, Intervention of external bodies in credit decision
making, Economic condition, There is a relationship between loan default and borrower’s culture and
Poor credit culture were rated among the least factors of borrower capacity causing occurrences of
nonperforming loans. Regarding Credit Assessment, Credit Monitoring, size of the Bank, credit terms
and conditions, Interest rate and Management Quality are the factors for nonperforming loans
occurrence in relation to bank specific factors and Factors of Foreign currency shortage on non-
performing loans, Delayed LC openings, Currency devaluation, Unavailability of basic raw materials,
Political instability, Social conflict, Unavailability of skilled labour, Lack of basic infrastructure,
Delayed project implementation schedule and Unemployment is positively-related to NPLs are the
factors for non performance loans occurrence in relation to external factors.
A non-performing loan is able to affect the capability of banks to play their role in economic
development. The fast increase in NPLs not only increased banks’ weakness to further problem but
also limited their lending operations with broader repercussions for economic activity. Therefore,
Understanding the causes of NPLs is vital for designing appropriate regulatory actions to strengthen
asset quality of the bank.
Poor credit policy and procedure, poor monitoring and follow up by Banks, High risk appetite by
Banks were rated to be the top three factors causing loan default. On the other hand charging high
interest rate and rapid loan growth were rated among the least factors causing occurrences of
nonperforming loans. In a SPSS data result average response indicated that respondents agreed that
credit assessment is related to loan default. They also agreed with the fact that loans follow up
/monitoring is related to occurrence of nonperforming loans.

44
The study finding revealed that three explanatory variables from borrower specific factor (Diversion
of loan and income by borrowers, Poor credit management capacity of Borrowers, and Intervention of
external bodies in credit decision making) had major contribution for loan default in DBE, while
explanatory variables from bank specific factor (Customer Due Diligence (CDD) policy of Banks
leads to high loans quality, Poor risk assessment would lead to loan default, The bank credit
assessment procedure leads to loan default, Poor loan follow up and monitoring contributes for
increment of nonperforming loans, Rapid credit growth results in higher levels of NPLs, The reason
for bank’s high NPLs is its nature of concentrating on mega projects, Bank’s great risk appetite is
cause for NPL and the bank policy defines its priorities; clarify the way it manages credit risk;
enhance accountability and responsibility in its credit provision process. ) had major contribution for
loan default in DBE. And almost all explanatory variables from external factors (Delayed LC
openings, Currency devaluation, Unavailability of basic raw materials, Political instability, Social
conflict, Unavailability of skilled labor, Lack of basic infrastructure, Delayed project implementation
schedule and Unemployment is positively-related to NPLs) have considerable contribution for loan
default in DBE
Based on this finding the researcher concluded that, the Bank’s highest amount of non-performing
loan or default rate was due to the Bank’s specific factor, borrowers’ specific factor and external
factors.
On account of the interpretation of collected data during the course of the study, the researcher came
up with the following conclusions.

Concerning bank employee respondent’s profile, it is likely to suppose that respondents have ample
experience in the banking area as well as in the credit process. Moreover, they are well qualified.
Hence, they have a better knowledge of project finance. Regarding bank borrower respondents
profile, they are from different sector and background therefore; it can show the real problem of the
bank.

According to the data collected there is a relationship between the size of credit and nonperforming
loan. Poor loan follow up and monitoring contributes for increment, rapid credit growth, Poor risk
assessment would lead to loan default and Intervention of external bodies in credit decision making
were believed to cause for the occurrence of loan default. However, this study didn’t support having a
large number of borrowers are a cause of loan default.

Regarding credit performers capability the collected data show that it have its own contribution for
the occurrence of deflated loans. This finding is in line with bank specific factors for the occurrence

45
of NPLs in DBE: Poor credit appraisal (analysis), lack of strength in due diligence assessment on
credit applicants, behavioral and technical competency problem of credit performers.

Concerning borrower’s specific causes the result shows Poor credit management capacity of
Borrowers, Intervention of external bodies in credit decision making, Willful
default, There is a relationship between loan default and borrower's culture and Poor credit culture are
the main causes for the occurrence of nonperforming loan. Meanwhile, the market situation was
considered as one of the reason for the borrower to be a nonperformer. However, according to the
data collected the borrowers have fewer problems in marketing. Therefore, in this study marketing is
not one of the factorsof nonperforming loans.
External specific factors mostly consist of microeconomic factors of nonperforming loan. This
microeconomics affects the borrower capacity to pay the loan in specific time. According to the data
collected foreign currency shortage and delay project implementation are the main reasons for the
occurrence of nonperforming loan.

5.4. Recommendation
Based on the research findings, the following possible policy implications are made to reduce
Nonperforming loan in Development Bank of Ethiopia.
 The bank should attempt on improving its loan collection by strengthening its loan follow up
units and their activities, undertaking regular and continuous project follow up on active
projects in order to identify early caution of loan default and to take timely action based on the
follow up report. The bank should undertake even more frequent project follow up on those
projects indicating sign of sickness and also should strength its project rehabilitation and loan
recovery units’ works, these in turn contribute to increase loan collection of the bank, besides
by establishing different motivation skims to project follow up officers the bank can improve
its loan collection.
 The Bank as a whole and the credit units of the Bank especially, should work to reduce and
minimize intervention of external bodies in credit decision making,
 The bank should provide adequate technical support for its borrowers by strengthening its
technical unit’s capacity and efforts to do so.
 Concerned organs should work to provide reliable project appraisal data at country level.
 Development bank of Ethiopia top management should ensure the adequate monitoring system.
 DBE should apply detail and adequate risk assessment. Therefore, latest assessment procedure
should be adopted on selection of customers, credit analysis and sanctioning process.
46
  The Bank has to strengthen relationships with concerned organ especially with Ministry of foreign
affairs and Ethiopian embassies abroad for CDD assessment and to protect the bank’s interest
from potential conflict of interest especially with regard to pro forma invoice and credit status of
foreign applicant.
 The management involvement in critical to solve the NPL of projects so as to recover the loans.
 For strengthen the collection and realize the smooth implementation and operation of the projects
the Bank has to ensure timely and proper follow up and technical support for all financed projects.
 The bank should improve the capacity of its credit performers: through providing continuous
trainings relevant to credit operations of the bank, doing these will improve capacity related
problems of credit performers.
 Credit Policy and procedures used in the bank should be out of government intervention and
updated according to current situation in order to control the increasing NPL’s in the bank.
 The credit process of the bank should be transparent and accountable in order to control the
raised from the stake holders. The banking policy needs to look at both the policies that
govern the internal functioning of banks and the external stakeholders who are affected by the
banks.

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Ahmmed, M., Serajul,I., &Rahman, M. (2012). Analysis of Repayment Behavior in Banks Customer
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Barr, R. S, and T. F. Siems (1994), Predicting bank failure using DEA to quantify management
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Bloem, A., & Gorter, C. (2001).The Treatment of non-performing loans in macroeconomic statistics,
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Bercoff, Jose J., Julian di, Giovanni & Franque Grimard. 2002. Argentinean Banks, Credit
Growth and the Tequila Crisis: A Duration Analysis”.
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Esty, B, 2001, “Calpine Corporation: The evolution from project to Corporate Finance” Harverd
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Fikirte Gashaw, (2015).Determinants of Default. In the case of CBE. Master’s Thesis, Addis Ababab
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Hassan, H., Ilyas,M. &Rehman,C. (2014),Quantitative Study of Bank Specific and Social factors of
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II. APPENDIX : QUESTIONAIRESE

Ethiopian Civil Service University

College of Finance, Management and Development

Department Accounting and finance

Questionnaire to be filled by Employee of Development Bank of Ethiopia

51
Dear Respondent,
This questionnaire intends to gather data on factors that affect Non-Performing Loans (NPL) in
Development Bank of Ethiopia.

The data collected will help the researcher to recommend alternative measurements that could improve
the Non-Performing Loans of Development bank in Ethiopia and for partial fulfillment of Masters of
Science Degree in Accounting and Finance.

The information that you provide will be used only for academic purpose. I kindly request you to
respond freely and honestly as your response has great value in assessing the current factors
Influencing Non Performing Loans in the Bank’s operation and management decision.

I assure you that all your responses will be kept strictly confidential and used only for academic
purpose only.
Thank you for your cooperation and response in advance

General Directions:
 You are not required to write your name
 Please put (√) mark in the box that best describes your response
 Write your opinion in the blank space provided and for some items you can use other sheets of
paper if the space provided is not sufficient.

PART I: GENERAL INFORMATION OF RESPONDENTS

1. Your current position in DBE
Loan Officer/senior officer Credit process manager
Appraisal officer Rehabilitation officer
Credit principal Vice president of credit
Other, please specify _____________________
2. Please indicate your gender:
Male Female
3. Please indicate your Age
21-30 31-40 41-50 >50
4. Indicate your Education background
Diploma 1st Degree 2nd Degree PhD
5. Indicate your work experience in DBE
52
 Less than 1 year 11-15 years above 15 years
1- 5 years 6-10 years
PART II: QUESTIONS ON THE FACTORSOF NON PERFORMING LOANS
Please indicate your degree of agreement or disagreement to the statements pertaining to credit
assessment and the occurrence of NPL

No. Description Stro Agre Some Some Disagre Strongl

ng e (2) What What e (5) y
Agre Disagre Agre Disagre
e e e e (6)
(1) (3) (4)
1. Factors for NPL occurrence in relation to Bank-Specific Factors
1.1. Regarding Credit
Assessment
1.1.1 Factors of non-performing loans
are obvious
1.1.2 Customer Due Diligence (CDD)
policy of Banks leads to high
loans quality
1.1.3 Poor risk assessment would lead
to loan default
1.1.4 The bank credit assessment
procedure leads to loan default
1.1.5 DBE’s project appraisal and
evaluation parameters are not in
a very genuine and good manner
to provide achievement of project
realization
1.1.6 The bank financial projections
are exaggerated
1.2. Regarding Credit
Monitoring
1.2.1 Monitoring in the bank loans
ensures improved loan
performance
1.2.2 Poor loan follow up and
monitoring contributes for
increment of nonperforming
loans
1.2.3 DBE credit monitoring system
control over the entire process of
lending
1.2.4 The monitoring/follow up reports
53
 produced by the Bank do not
enable the Bank’s top
management pass informed
decision
1.3. Credit size of the Bank
1.3.1 Rapid credit growth results in
higher levels of NPLs
1.3.2 The reason for bank’s high NPLs `
is its nature of concentrating on
mega projects
1.3.3 Bank’s great risk appetite is
cause for NPL
1.4. Lenient credit terms and
conditions
1.4.1 The bank credit policy and
procedure are lenient
1.4.2 Lenient /lax credit term causes
loan default
1.4.3 The bank policy defines its
priorities; clarify the way it
manages credit risk; enhance
accountability and responsibility
in its credit provision process.
1.4.4 Priority areas of the bank are
investigated and selected
carefully
1.5. Interest rate
1.5.1 High interest rate related to other
Bank
1.5.2 Commitment interest due before
disbursement
1.6. Management Quality
1.6.1 Lack of experience employee on
credit
1.6.2 Lack of training
2. Factors for NPL occurrence in relation to External Factors
2.1 Factors of Foreign currency
shortage on non-performing
loans
2.2 Delayed LC openings
2.3 Currency devaluation
2.4 Unavailability of basic raw
materials
2.5 Political instability
2.6 Social conflict
54
2.7 Unavailability of skilled labor
2.8 Lack of basic infrastructure
2.9 Delayed project implementation
schedule
2.10 Unemployment is positively-
related to NPLs

Please state what needs to be done for sustainable improvement on the level of NPL on
DBE’s loan portfolio.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
__________________________________________________.
End of the questionnaire
Thank you

Ethiopian Civil Service University

College of Finance, Management and Development,

MA Degree in Public Finance Management

Questionnaire to be filled by Borrowers of DBE to know Determinants of Non Performing Loans
Dear Respondents,
This questionnaire is prepared to collect data from Development Bank of Ethiopia (DBE) customers
to undertake thesis paper for partial fulfillment of MA in Public Finance Management and
Accounting on the title, An Empirical Analysis of Factors of Non-Performing Loans: the Case of
Development Bank of Ethiopia in the Bank’s operation and management decision. The information

55
that you provide will be used only for the analysis of the study which I am conducting as partial
fulfillment of the MA.

I kindly request you to respond freely and honestly as your response has great value in assessing the
current factors Influencing Non Performing Loans in the Bank’s operation and management decision.
I assure you that all your responses will be kept strictly confidential and used only for academic
purpose only.
Thank you, for your cooperation and response in advance.
General Direction:
➢ You are not required to write your name

➢ Please put (√) mark in the box that best describes your response

➢ Write your opinion on the blank space provided and for some items you can use other sheets of
paper if the space provided is not sufficient.

PART-I: GENERAL INFORMATION OF RESPONDENTS

1. Age: 21-30 □ 31-40 □ 41-50 □ >50 □

2. Gender: Male □ Female □
3. Educational level: Diploma □1st Degree □2nd Degree □PhD □
4. Years as Bank customer: 1-5 □6-10□11-15 □ 16-20 □>20 □
5. Business sector: Agriculture □Manufacturing □Mining & energy □ Service □
➢Please specify your business sector if other: _____________________

Please indicate your degree of agreement or disagreement to the statements pertaining to customer
specific factors and the occurrence of NPLs
No Description StronglyAgree Agre Somewha Somewha Disagre Strongly
. (1) e (2) t agree (3) t Disagree e (5) Disagre
e (6)
(4)

56
 Factors for NPL occurrence in relation to diversion and borrows capacity

1 Diversion of loan fund

and income by
borrowers

2 Poor credit mgt capacity

of Borrowers

3 Willful default

4 Intervention of external
bodies in credit decision
making

5 Market condition

6 There is a relationship
between loan default and
borrower's culture

7 Poor credit culture

Please state what needs to be done for sustainable improvement on the level of NPL on
DBE’s loan portfolio.
_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

End of the questionnaire

Thank you

57