Non-performing loans and financial development: new evidence

Abstract

PurposeThis paper aims to investigate the influence of financial development on non-performing loans (NPL).Design/methodology/approachThe model used in this study follows the NPL model of Louzis et al. (2012), Ozili (2015) and Beck et al. (2015).FindingsThe findings indicate that financial development, measured as foreign bank presence and financial intermediation, are positively associated with NPLs. Also, bank efficiency, loan loss coverage ratio, competition and banking system stability are inversely associated with NPLs, while NPLs are positively associated with banking crises and bank concentration. In the regional analysis, NPLs are negatively associated with regulatory capital and bank liquidity, implying that banking sectors with greater regulatory capital and liquidity experience fewer NPLs.Practical implicationsNational bank regulators/supervisor should not only consider the role that financial development structures play in influencing aggregate NPLs but also ensure that thorough supervision of the lending practices of banks is in place as well as the active monitoring of the financial intermediation process in the country.Originality/valueThe study is the first to use a global sample to examine the direct relationship between NPL and financial development.