Abstract
Using panel data approach in the Pakistan banking sector over the period 2010 to 2016, we examine the bank-specific and macroeconomic determinants of non-performing loans. We use quantitative research design with OLS random effect model. Furthermore, we use various regression and correlation analysis in this study. We find that rise in capital adequacy ratio, bank size, GDP growth rate, and inflation, reduces the non-performing loans (NPL) ratio. Our results also show that a rise in loan loss provisions enhances the NPL ratio. Our results suggest that banks with poor asset-quality can sabotage the growth of fiscal as well as the economic sector. Outcomes of the study emphasis on the need to clear-out the NPLs to keep financial sector sound. NPLs can cause high loan loss provisions which affect the capitalization of banks that ultimately impacts fiscal and economic growth. Bank supervisory agencies should therefore pay attention to monitory and macroeconomic policies of the banks. This study examines the impact of idiosyncratic and macroeconomic determinants of non-performing loans on banks’ asset quality using recent data from 2010 to 2016, the time period when major banking sector reforms were launched.
Highlights
Among all the financial institutions, the role of banks is most significant and distributional
A study by Farhan et al, (2012) on Pakistani banking sector shows that interest rate, energy crises, inflation, unemployment, and exchange rate have a significant positive impact on nonperforming loans of banks while Gross Domestic Product (GDP) growth has a negative impact on non-performing loans ratio, this study shows how term loans become bad loans due to low production of industrial sector because of energy crises
Large banks have a better opportunities to deal with non-performing loans, so they have a low level of non-performing loans they find a negative relationship between bank size and non-performing loans (Hu Li & Chiu, 2004; Louzis et al, 2012; Swamy, 2012) conduct a research study in Nigeria for 20 years and the results show that huge ratio of non-performing loans reduce the performance of banks as it reduce, the return on capital employed in both short run and long run
Summary
Among all the financial institutions, the role of banks is most significant and distributional. Banks are vital for the economy and for organizational events predominantly for money related events. Industrial, agricultural and commercial development is not conceivable without the role of banks (Babar, Zeb & Lions, 2011). The banking sector plays an important role in the economic growth of a country as banks are intermediary houses between the excess and deficit components of the economy, keeping funds from the savers and proceeds loan to the investors for investments and channelizing the funds to productive investment. Financial institutions mainly banks have momentous input in economic constancy, stable capital market, dissemination of capital, moving funds, effective risk supervision, dissipating and settlement of payments, amalgamation of assets and in viable development of economy (Hartlage, 2012)
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