Abstract:
Objective –This paper examines the effect of bank-specific factors on non performing loans in Tanzanian commercial banks (CBs).
Design/methodology – Using annual data covering the period of 2011 -2020, a
quantitative study methodology was employed. The authors used a one-step
generalised method of moments (GMM) approach to estimate the effect of bank specific factors on the percentage growth of NPLs in Tanzania.
Results – According to the findings, increased return on assets, bank operating
efficiency, income diversification, loan to-asset ratio in CBs reduces NPLs. In contrast,
an increase in the deposit-to-asset ratio, capital adequacy, and age significantly
increases the level of NPLs, which is consistent with the adverse selection theory.
Conversely, decreased lag NPLs and raised bank operating efficiency will reduce the
current year's NPL rate and vice versa.
Research limitations/implications – Commercial banks should reduce the risk
of defaulting borrowers by adjusting the contractual terms to the anticipated average
quality of their applications. In addition, small banks should strive to maintain
management efficiency to increase their profitability. Authorities should impose
micro-prudential supervision on commercial banks' lending behaviour to reduce the
number of NPLs.
Novelty/Originality – The paper includes bank size (large and small banks) using
both a one-step difference and a one-step system approach to measure the effect of
bank-specific factors, which is usually not the case with most studies.
