Non-performing Loans Issues in Malaysian Banking Industry

Abstract

Around the world, financial institutions face massive risk on non-performing loans. As a result of the previous, financial institutions are obliged to review their lending policies. However, its nonpayment also leads to massive loss on banks in particular and the country in general. Non-performing credits (NPL) is a prevalent issue that influences budgetary markets dependability as a rule and banking industry suitability specifically. In recent decades, financial crises in various countries have often preceded the rise in non-performing loans (NPLs) in the banks' asset portfolios. The increase in NPLs is an adverse impact on the banking sector. Hence, understanding the determinants of NPLs is crucial to ensure the overall economy's efficiency and soundness. This research studies the factors affecting NPLs in the Malaysian banking industry. Through this research, the researchers can examine the relationships between the dependent variable, NPLs and independent variables, bank interest rate, inflation rate, and unemployment rate. The research uses monthly secondary data from 2015 to 2019, collected from the financial statements and DataStream and applies Descriptive Analysis, Normality Test, Correlation and Multiple Regression Analyses. The results indicate that unemployment and inflation significantly impact and relationship with the NPLs in the Malaysian banking industry. Meanwhile, the interest rate, despite its insignificance, positively affects the NPLs in Malaysia. The findings have important implications on policymaking, besides adding new knowledge to the existing literature.