Nexus between financial innovations, remittances and credit performance: Evidence from augmented ARDL and nonlinear ARDL

Md Qamruzzaman

doi:10.21511/imfi.18(3).2021.25

Abstract

The motivation for this study is to assess the impact of financial innovation and remittances on bank-based financial institutions’ credit performance in Bangladesh for the period 1981–2019. The study applies augmented ARDL (AARDL) and nonlinear ARDL (NARDL) to identify both long-run and short-run effects and directional causality by performing non-granger casualty tests. AARDL confirms the presence of a long-run association between financial innovation, remittance, trade openness, FDI, and credit performance, which is measured by non-performing loans. In the long run, financial innovation and FDI volatility expose a positive link with NPLs, but remittance inflows and trade openness establish a negative association. Asymmetry shocks in financial innovation reveal a positive relationship with credit performance. In contrast, the asymmetric shock of remittance and trade openness unveil a negative tie to credit performance, especially in the long run. Furthermore, directional causality provides evidence to support a feedback hypothesis explaining causality between financial innovation and credit performance, as well as remittance inflows and credit performance. These findings suggest that credit performance is guided by future development in remittances and financial innovation; thus, closer attention from policymakers and financial experts is persistent to capitalize or mitigate the impact of the financial system.

Highlights

The effect of non-performing loans on financial systems is widely used at an international forum
augmented Autoregressive distributed lag (ARDL) (AARDL) confirms the presence of a long-run association between financial innovation, remittance, trade openness, FDI, and credit performance, which is measured by non-performing loans
The findings suggest that domestic firm credit perforThe results of the study reveal quite a few causal mance are largely dependent on macrofundamenassociations between financial innovation, trade tals; financial policymakers should emphaopenness, remittances, FDI inflows, and non-performing loans (NPLs). size the impact of macroeconomic movements on the study predominantly focuses on the implementation of financial policies

Summary

Introduction

The effect of non-performing loans on financial systems is widely used at an international forum. Financial institutions repetitively tried to minimize the conversation rate of NPLs arising from the creation of their assets. Over the past decades, several reforms and projects have been carried out aimed at reforming banking and financial structures in numerous countries. The enhanced quality of banks’ reserves is due to faster growth in nominal income and credit, expanded financial inclusion, as well as the attempts of supervisory authorities to enhance the control of banks’ credit risk and underwriting activities. The non-performing loan – fundamental macro nexus have attracted immense interest among scholars (Dimitrios et al, 2016; Anjom & Karim, 2016; Turan & Koskija, 2014; Ghosh, 2015; Grigoli et al, 2018; Makri et al, 2014)

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