The Effect of Macroeconomic Variables on the Asset Positions and Financial Performance of Non-Banking Financial Institutions (NBFIs) in Jamaica

Floyd Thompson

doi:10.4236/ojbm.2021.93076

Abstract

The aim of the paper is to evaluate the effect of macroeconomic variables such as real GDP, unemployment levels, bond yields, stock market growth, and interest rate on the asset positions and financial performance of non-banking financial institutions (NBFIs) in Jamaica. This is reflected by return on asset (ROA) ratio, return on equity (ROE) ratio and total asset growth (TA). To explore the nature of the short and long-term relationship between dependent variables and independent variables, the research used a bound test approach to the co-integration and error correction process using time series data over the period from 2005Q1 to 2020Q3. The results showed that real gross domestic product (RGDP) and unemployment rate (UR) had a positive long-run relationship with ROA; government bond yield (GBY), UR, interest rate (IR) and stock market growth (JSEM) influenced ROE positively at the long-run; while all the independent variables showed a long-run causal relationship with TA. In the short-run estimates, however, minimal short-run causal relationships among variables could be identified with ROA, ROE and TA. Meanwhile, the research has shown there is a stable long-run relationship between the three profitability metrics and the variables that have a significant long-run relationship with them. This assumes that, in the event of some shock to the system, the model will converge back to equilibrium. Furthermore, the cumulative sum of recursive residuals (CUSUM) checks validated the model’s stability.

Highlights

In the age of globalization, the threat of competition made many businesses more mindful of the value of financial performance
The results showed that real gross domestic product (RGDP) and unemployment rate (UR) had a positive long-run relationship with return on asset (ROA); government bond yield (GBY), UR, interest rate (IR) and stock market growth (JSEM) influenced return on equity (ROE) positively at the long-run; while all the independent variables showed a long-run causal relationship with total asset growth (TA)
This research analyzed how the asset positions and financial performance of the regulated sectors (Insurance, Securities and Pension) non-banking financial institutions (NBFIs) respond to the impact of different macroeconomic variables using the Auto Regressive Distributive Lags (ARDL) bounds testing approach to co-integration over the 2005Q1 to 2020Q3 period

Summary

Introduction

In the age of globalization, the threat of competition made many businesses more mindful of the value of financial performance. It is clear that the performance of companies is influenced by both internal and external factors. Internal factors relate to the capacity of firms to gain efficiency and minimize costs whereas the state of the economy, government policy, exchange rate, GDP, unemployment rate, and others, are often perceived to be key components that influence the business from an external point of view. NBFIs are subtly different and have different phenomena from banking institutions. NBFIs aid in the rotation of capital, the allocation of assets and the management of profits to influence economic development by improving the job sector and boosting financial markets, resulting in the growth of Jamaica’s gross domestic product (GDP). Well-functioning financial institutions play a significant role in economic development and financial performance (Rabaa & Younes, 2016). Jamaica’s financial system today is more mature, robust, and better developed, which plays a key role in accelerating the stable growth of Jamaican economy

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