Abstract
PurposeThis study empirically analyzes whether the rapid growth of loans and risk-taking behavior during the expansion of loans affected non-performing loans (NPLs) and the solvency of financial institutions in the Turkish banking system.Design/methodology/approachUsing the GMM Generalized Method of Moments, this study used data on Turkish banks from 2011 to 2017 to test two hypotheses on the effects of loan growth on NPLs and solvency.FindingsThis study finds significant results for the effect of loan growth on NPLs and solvency. NPLs rose from the previous year’s loan growth, which tended to reduce solvency.Research limitations/implicationsDue to selected research methods, the results may lack generality. Therefore, future studies should test the propositions herein further.Practical implicationsThe results indicate that careful allocation behavior is required when lending. Additionally, these findings may be helpful to financial managers and decision makers.Originality/valueThis study confirms the need to determine how to allocate loans during the loan boom periods.
Highlights
As the International Monetary Fund, Ernst & Young1, and other agencies point out, the Turkish banking system has a relatively low proportion of non-performing loans (NPLs), despite the recent economic downturn and foreign exchange risk
NPL-related literature Louzis et al (2012) used nine Greek deposit banks for 2003 and the first quarter of 2009 for the third quarter, by following Blundell and Bond’s (1998) system generalized moment estimator (GMM) estimator to analyze the factors that affect the NPL ratio. They conclude that economic growth, unemployment, public debt, interest rates, and profitability measured by return on equity (ROE) have a considerable impact on the proportion of NPLs in Greek banks
H1: swift growth in loans raises the amount of NPLs In the second assumption, we explore how loan growth influences solvency
Summary
As the International Monetary Fund, Ernst & Young, and other agencies point out, the Turkish banking system has a relatively low proportion of non-performing loans (NPLs), despite the recent economic downturn and foreign exchange risk. NPL-related literature Louzis et al (2012) used nine Greek deposit banks for 2003 and the first quarter of 2009 for the third quarter, by following Blundell and Bond’s (1998) system GMM estimator to analyze the factors that affect the NPL ratio They conclude that economic growth, unemployment, public debt, interest rates, and profitability measured by return on equity (ROE) have a considerable impact on the proportion of NPLs in Greek banks (commercial, consumer, and mortgage loans). Boudriga et al (2010) and Li et al (2016) use a randomized regression analysis to examine how bank-specific institutions, the business environment, and macroeconomic environmental indicators affect NPLs in the Middle East and North Africa (MENA) region rate using a sample of 46 banks from 12 countries for 2002–2006, They find that the institutional environment, bank capital, loan loss provisions, credit growth, foreign participation, and problem loans are significantly related. NPLit 1⁄4 α0 þ β1NPLi;t−1 þ β2LGit þ β3Sizeit þ β4LEV it þ β5EFFit þ β6GDPt þ β7INFt þ β8R0Lt þ β9P0LST t þ μit ð2Þ
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