Non-performing Assets And Their Impact On Financial Performance Of Commercial Banks In Ethiopia

Non-performing assets are always a center of concern for banks as well as all in the businessrnworld as a sound financial system, among other things, requires maintenance of a low level ofrnnon-performing assets. In this regard, to control the increasing non-performing assets inrnEthiopian banking sector, the National Bank of Ethiopia issued a directive which strictlyrnrequires all banks to maintain ratio of their non -performing assets below five percent. Thernmain objective of this study is, therefore, to examine the impact of non-performing assets onrnfinancial performance of Ethiopian commercial banks as increasing trend of non-performingrnassets are still a concern of some banks. Research hypothesis is developed which inquires thernrelationship and effect of non-performing assets on commercial banks financial performance.rnA quantitative approach is employed for the required data collection and a sample of sixrncommercial banks are selected for data collection on a cross sectional basis for nine years.rnThe data is then anayzed using descriptive, correlation and regression techniques throughrnSPSS sofware pachage. .The findings of the study revealed that non-performing assets havernstatistically significant negative impact on the financial performance (ROA) of Ethiopianrncommercial banks in agreement with the hypothesis. Moreover, loan loss provision andrncapital adequacy ratios refleced an inverse and direct causal relationship with financialrnperformance of commercial banks (ROA) respectively. Therefore, it is recommended thatrncommercial banks in Ethiopia should enhance their capacity in credit analysis and loanrnadministration while the regulatory authority should pay more attention to bank’s compliancernto relevant provisions of the bank and other prudential guidelines.rnKey words: Non-Performing Assets, Financial performance

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