Loan growth drivers in state-owned banks: A fixed effects model approach

Abstract

Loan growth is a critical driver for economic development, and comprehending the determinants affecting lending in state-owned banks is vital for enhancing financial sector stability and performance. This paper examines the factors that affect loan growth in state-owned banks in Bangladesh. We collected data over a 11-year period from 2012 to 2022. We applied ordinary least square method primarily followed by fixed effect estimation. To check the validity of the regression models of the study, we have considered several diagnostic tests. Our findings indicate that loan growth in state-owned banks is influenced by several industry-dependent variables i.e. size, liquidity, efficiency, non-performing loans, etc. The influence of bank size, income, liquidity, non-performing loan ratio, and cost-to-income ratio is the main emphasis of this study's investigation into the factors influencing bank lending. According to the statistics, there is a significant positive correlation between size and lending. Bank liquidity and lending show a strong negative correlation. The study also found higher lending is associated with higher non-performing loans significantly. The efficiency ratio shows a substantial negative impact on lending. To improve bank performance and stability, policymakers and bank management may benefit greatly from these results. Policymakers need to integrate various macroeconomic and qualitative elements into regulatory frameworks to bolster financial stability while facilitating sustainable loan expansion. Bank management can enhance efficiency by decreasing the cost-to-income ratio and strengthening credit risk management, while utilizing bank size for strategic expansions to increase lending capacity.