Analysis of Factors Contributing To Non-Performing Loans in Tanzania Local Banks

Abstract

The study aimed at analyzing the factors contributing to non-performing loans in Tanzania's local banks, specifically focusing on NMB Bank PLC. Specifically, the study sought to assess the effects of macroeconomic conditions on non-performing loans at NMB Bank's Dar es Salaam zone, examine the influence of bank lending policies on non performing loans within the same region, and evaluate the effects of economic stability on non-performing loans at NMB Bank in Dar es Salaam. The study employed a pragmatism research philosophy, combining quantitative and qualitative methods to analyze factors affecting non-performing loans at NMB Bank PLC. A mixed-methods approach provided a comprehensive view, utilizing a convergent parallel design for simultaneous data collection and analysis. The focus was on the Dar es Salaam zone, chosen for its economic significance and high banking activity. The target population comprised 250 bank employees, with a sample size of 154 determined using the Yamane formula. Both simple random and purposive sampling techniques were used to ensure diverse insights. Data collection involved questionnaires for quantitative data and semi structured interviews for qualitative insights, with statistical analysis performed using SPSS to assess the impact of macroeconomic conditions and bank policies on loan performance. From the findings, it was revealed that macroeconomic conditions, including inflation, interest rates, and GDP growth, significantly impact non-performing loans (NPLs) at NMB Bank in the Dar es Salaam zone, explaining 53% of the variance in NPL levels. Stable economic conditions reduce NPLs, while volatility increases risks, with a statistically significant p-value of 0.000. Additionally, effective lending policies correlate with a 0.726-unit decrease in NPLs for each one-unit improvement, supported by a strong negative correlation of -0.801. Therefore, it is recommended that NMB Bank incorporate macroeconomic monitoring into its risk management strategies and enhance lending policies through sound credit assessments to mitigate risks and improve financial stability. These measures are essential for strengthening risk management frameworks in Tanzania’s banking sector.