1.1 Background of research

A bank loan is a type of advance that is a specified sum of amount given to an individual or business by bank either a commercial bank, savings bank. etc. (the lender). A bank loan has a specific duration of payment and usually on fixed-interest terms related to the base rate of interest (depending on country), with the principal being repaid either on a regular instalment basis or in full on the appointed recovery date.
Bank loans form at least 80% of the total assets in a bank in countries such as Tanzania, as an assets it generates high interest income for the bank hence is a huge performance determinant in any bank. Hence when even the smallest portion of the loans are not paid in time, the bank financial performance will be shaken. This is where non performing banks or bad loans come from.
Non-Performing Loans (NPL) are bank advances to the market on which the borrower is not making interest payments or repaying any principal. At what point the loan is classified as non-performing by the bank, and when it becomes bad debt, depends on local regulations. A non-performing loan as per BOT policy are classified depending on the number of day s that they are overdue, the scenarios are as follows;
Number of days past due BOT Classification
31 – 60 Especially mentioned
61 – 90 Substandard
91 – 180 Doubtful
181 or more Loss

In view of the important position the bank sector has in the economy, it is vital to identify causes of non-performing loans. This is as non-performing loans can affect the capability of banks to play their role in the growth of the economy. For many bank, most of their non-performing loan are considered they are in arrears for at least ninety days and above.
1.2 Objectives of research
The general objective of the study is to assess the causes and effect of non-performing loans in Tanzania commercial banks.
The specific objectives of the study is
• To assess the causes of non- performing loans related to Tanzania commercial banks
• To assess the effects of non- performing loans related to Tanzania commercial banks
This proposal is focused in the determination of the causes and the effects of non-performing loans that are related to commercial banks that are in Tanzania. As the banking sector has experienced the slowest growth in the recent years reaching only TZS 166 Trillion in 2016 up from TZS 15.49 Trillion in 2015that was equivalent to 7.2 per cent growth; this is according to data released by the Bank of Tanzania (BOT). the ratio of non-performing loans to gross loans increased to 9.5 per cent for the year 2016 compared to the ratio of 7.88 per cent at December, 2015 according to the BOR monetary statement and annual report of the directorate of banking supervision.
With a benchmark of 5.0 per cent in the country, the country has seen reports of NPL going to stunning length. The list of the top five banks with the largest amount of non-performing loans is steered by mostly the big banks led by CRDB standing at a NPL amount of TZS 436.7 Billion followed by TIB (Tanzania Investment Bank) whose non-performing loans reached TZS 238.5 Billion. NMB who is the largest bank in term of profits and assets recorded an NPL level of TZS 84.3 Billion, followed by NBC at TZS 75.9 Billion and Standard Chartered at TZS 65.6 Billion.
The case study area will with the top banks in Tanzania namely CRDB, NBC, NMB, DTB and Exim. This is due to the fact that the above mentioned banks are currently domination a huge market cap and most have been operating long enough to give an in-depth insight on the aimed market.
1.3 Research question
This research will addressed the following research questions:
a) How does the bank contribute in the rise of non-performing loans?
b) What are the economic factors that affect non-performing loans in commercial banks?
c) How does customer’s related issues causes contribute to non-performing loans?
d) How the rise in non-performing loans effect the overall market?
e) What are the ways to reduce the level of non-performing advances level in commercial banks?
1.4 Scope of research
The research focuses on the causes and effects of non-performing loans that related are related in commercial banks. This research will base on commercial banks in Tanzania especially on the top banks in the country with a huge sizes of deposit and broad branch networks. This is on the fact that those banks that have enough sample size to give out information that will be enough to give the kind of academic insight the research seeks to offer. Besides, the above mentioned bank lends to almost all the major sectors of the economy.
1.4 Significances the research
The research will give an understanding and provide the knowledge of understanding the cause of the increased non-performing loan rate and the effects it has in the market. The study is going to explore and recommends potential areas that bankers need to put more efforts when sanctioning credit services. With good and sound credit policy and easy implementation of the policies, systematic processes for KYC to be carried by the banker, the levels of NPL are believed to improve.

2.1 Introduction

This chapter reviews existing literature on the factors that affect non-performing loans. The literature review drew upon secondary materials that have been written around the research topic. The literature review mostly focused of literature that related to the four research questions namely; causes of non-performing loans and mechanisms that will assist in reducing the level of non-performing facilities in various banks to deal with the problem of non-performing loans.
2.2 Summary on non performing loans

When banks are realizing timely installment loan payments, the loans are said to be performing well and the banks become profitable. In fact, lending is the main function of the banking industry as the rates that the banks charge on the advances is the main source of their revenues. Because loans and advances are the most profitable ventures for commercial banks, banks are always willing to provide more loans to borrowers despite the fact that this is a risky venture. Loans that have not been paid over the defined period of time are said to be non-performing and are dangerous to the bank as they may cause the ultimate collapse of the bank, the banking industry and the entire economy.
Non-performing loans are the loans which are unrecoverable within the time stipulated by the laws of the country or as agreed to by the bank and the borrower at the time of provision. As such, the possibility of obtaining income from such loans is uncertain. Non-performing loans has also been deemed as loans whose repayment period is more than 90 days with are categorized as doubtful debts. The issue of non-performing loans has gained a lot of attention in many countries around the world especially since the financial crises of 2007 – 2008, as it was believed to be the main cause of failure of most banks during the crisis.
In fact, non-performing loans are so crucial to the bank because they can be used to determine the banking industries? stability and durability as a well the profitability of the bank. This is because non-performing loans can reduce a bank’s investment resource rendering the bank unable to grow or develop its business and the result is the insolvency or liquidation of the bank. Non-performing loans are potential risks to the banking industry and the economy because they have the potential to reduce bank’s liquidity, cause credit expansion and permit the slump of the real sector. Furthermore, banks with high NPLs in their portfolio of investments will certainly realize a reduction in their revenue earnings and cash flow deficit if most of their deposits have been used to lend in the market.
2.3 Conceptual Framework

2.3.1 Dependent Variable

Dependent variable that guides this research is non-performing loans. Non-performing loans depends on numerous of variables that can be grouped mainly into bank operations variables, customer operations variables and macro- economic variables.

2.3.2 Independent Variable

Independent variables are grouped into banking operations variables, customer operations variable and macro-economic variables.

2.3.2 Variable Related to Bank Operations

Variables that related to bank operations are credit policy, credit appraisal, competition, queue, and under or over financing
2.3.3 Variable Related to Customer Operations

Variable those are related to customer operations are moral hazards, inadequate business, financial, marketing, entrepreneurship and management skills, fund diversion and multiple loans.
2.3.4 Variables related to Macro economic factors

Variables that are related to changes in the surrounding business environment events such as changes in bank policies by the BOT, Taxation changes, stiff market competition, change in exchange rates and political impacts.

2.4 Non performing loans in Tanzania

The Tanzanian market has been facing a huge increase in the Non-performing Loan is the recent years to an alarming rate. Bank have been faced with challenges in the recovery of instalment hence many of their loan have been going bad. The biggest reasons that most of the NPL’S are the current challenges and fluctuations that are facing the market, which has resulted to a fall in the economy.

As per most bank financial reports of 2017, most bank reported high levels of non-performing loans (NPLs) ranging from four per cent to fifty per cent with averaged increase from 6.4 to 9.5 per cent when figures are placed in perspective. There is broadly agreed that high NPL levels ultimately have a negative impact on the bank but as well as reduced the lending to the economy resulting to a decrease in market funding.

This research will look into the reason to the occurrence of high NPL in the market and its effect in the general market. This will give us a better understand of the scenarios and hopefully will lead to a exploration for the solution to at least decrease the NPL rates.


3.1 Data Collection and Sampling

The research will use the quantitative technique of research to define the present study. Quantitative research shows quantifying connection between variables by using different statistical techniques for descriptive data analysis and the establishment of the proposed hypotheses (Creswell, 2008).The data for this study was obtained from audited annual financial statements of individual banks for the period of 5 years from 2012 to 2017. We shall use the five banks mentioned above that are CRDB, NBC, NMB, DTB and Exim banks as a sample in the