Investigation of the factors contributing to non-performing loans in commercial banks in Tanzania

The study investigates internal and external related factors influencing Non Performing Loans (NPLs) in commercial banks in Tanzania. The study used descriptive and explanatory case study research design. This study was guided by asymmetry theory, agency theory, stakeholder’s theory, political legitimacy theory and regulation theory. The sample size was 200 respondents. The study used quantitative methods in which questionnaires were administered from Stannic Bank Tanzania Limited. The data were analysed through the SPSS version 20. The SPSS was used to perform factor analysis, production of frequency tables as well as the application of multiple regression models to determine the influence of internal and external factors influencing NPLs.The findings of the study revealed that the external factors influencing NPLs are change in the fiscal policy (a decrease in public spending through cutting costs, unemployment and changes in tax level). The study also found that inflations significantly influence NPLs. Furthermore, the study revealed that the internal factors that influencing NPLs are Bank cost of capital (cost of fund deposits and equity) and credit risk management (inadequate credit risk management and ineffective mechanism in risk mitigation).The type of loans such as vehicle assets finance and salary loans are loans which potentially falling NPLs at the losses stage. It is concluded by the study that the external critical factors contributing to NPLs includes fiscal policy (decrease of public spending, unemployment and changes in tax level) and inflation. Internally, the study concludes that bank cost of capital and inadequate credit risk management are critically contributing NPLs in commercial bank in Tanzania. The finding of this study contributed to the agency theory, stakeholder’s theory, political legitimacy theory and regulation theory by some internal and external factors influencing positively to NPLs. The study recommends that the Government of Tanzania to control the inflation rate as well as to rethink about suitable fiscal policy that can positively stimulate economic conditions of country and hence reduce NPLs in commercial banks. The study further recommends that there is a need for the commercial banks to initiate adequate credit risks management and mitigations aimed to reduce NPLs.