Abstract
The purpose of this study is to determine the relationship between microeconomic factors with credit risk among selected commercial banks in Malaysia. For this purpose, a sample of seven out of 27 commercial banks in Malaysia was selected and the microeconomic factors affecting credit risk with six measurements of return on asset (ROA), bank size, leverage, the ratio of capital, interest income and return on equity (ROE) were examined by applying Panel Regression Fixed Effect (FE) Model for a period 20 years from 1998 to 2017. The scope of the study covers seven selected commercial banks in Malaysia namely: Affin Bank Berhad, Alliance Bank Malaysia Berhad, CIMB Bank Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad, Public Bank Berhad and RHB Bank Berhad. This study is using credit risk proxy by non-performing loan for dependent variable while independent variables that have been selected were returned on asset (ROA), bank size, leverage, the ratio of capital, interest income and return on equity (ROE). The findings of the study managed to reject the null hypothesis for return on asset, bank size, leverage, interest income and return on equity which indicates the five microeconomic variables give a significant relationship with credit risk. There are positive relationships between leverage, interest income and return on equity with credit risk while return on asset, bank size and ratio of capital are negatively related to credit risk. However, the study fails to find any significant relationship between the ratio of capital and credit risk for commercial banks in Malaysia.
Highlights
IntroductionCommercial bank can be defined as one of the financial institutions where the main activities provided such accepts deposits, offers checking account services, makes various loans and offers basic financial products like certificates of deposit and savings accounts to individuals and small firms
A commercial bank is a place where most people do their banking activities
This paper aims to determine the relationship between microeconomic factors with credit risk among selected commercial banks in Malaysia
Summary
Commercial bank can be defined as one of the financial institutions where the main activities provided such accepts deposits, offers checking account services, makes various loans and offers basic financial products like certificates of deposit and savings accounts to individuals and small firms. By providing loans like mortgages, auto loans, business loans and personal loans, the commercial bank has the potential to involve with credit risk. The issues related to credit risk will affect the banks as well as the entire economy of the countries. This circumstance happens when credits and advances that had been made by commercial banks had turned out as non-gainful. It will make this circumstance to create a large number of non-performing loans which had been characterized as a benefit or a record of a borrower that the bank needed to arrange as sub-standard or suspicious resource (Bank for International Settlements, 2005)
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