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Abstract:
The study intends to examine factor that affect quality of loan portfolio using non-performing loans (NPLs) as proxy variable in Tanzania for the period of 2006 to 2013. The study finding shows that there is no significant impact of banks specific variables and macroeconomic variables on bank asset quality except for GDP. The study finding reveals that banks specific variables (bank size, profitability, bank liquidity, capital adequacy, and operating efficiency) contribute to quality of loan portfolio, where as profitability measured by ROA and NIM decreases quality of bank loans portfolio. This suggests that management of banks concentrate in increasing loan portfolio with the view of increasing banks profitability which in turn increases risk of non-performing loans. On the other hands the finding reveals that GDP has significant positive impact on NPLs implying that economic performance is attributed with poor bank asset quality. The increase in NPLs might be caused by laxity of conditions attributed with issuance of loans to borrowers during good economic performance believing in business success and continuity. MCAP has insignificant negative impact on NPLs where as INF has positive impact on NPLs. This is caused by the increase in operating costs. The findings call for the study on the impact of behavioral factors on the quality of banks loans portfolio in Tanzania that will guide on the issue of specific policy by regulators to ensure financial stability
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