Loan Portfolio Research Articles

The role of financial literacy on the growth outreach of South African microfinance institutions

With the increased emphasis on financial inclusion by developing countries, the emergence, impact and sustainability of microfinance institutions (MFIs) is considered topical. This paper assesses the influence that financial literacy has on the growth outreach of MFIs, from a South African context. Using an online questionnaire, we collected data from 44 respondents, representing various MFIs in Limpopo, South Africa. In addition, interviews were conducted with four subjects from the regulatory body, MFSA. We applied panel data fixed effects regression, with binary logit component to measure relationships and effects of the variables under study. According to the results, there was strong consensus that financial literacy of MFI clients, proxied by loan portfolio education, and financial budgeting and investment training offered to MFI clients, improves overall MFI growth outreach, and MFI sustainability in the long run. The contribution of this paper is that, since microfinance institutions by mandate, pursue socio-economic goals, many are not geared towards being financially sustainable. However, with the drying up of grants, donor funds, subsidies and other capital injections into MFIs, it is important for them to implement alternative measures to ensure that their borrowers meet their repayment obligations timeously, hence improving institutional growth and sustainability.

Green central banking under high inflation—more of a need than an option: An analytical exposition for Turkey

AbstractMotivationCalls for a green monetary policy are intensifying as the climate crisis deepens. Although the leading central banks of low‐inflation countries are the spokesmodels of this discussion, considerations of green central banking under high inflation continue to lag. The motivation of this article is to contribute to this process with a working example from Turkey—an economy under severe inflationary pressure.PurposeOur first objective is to document the risks associated with climate change for the Central Bank of the Republic of Turkey (CBRT) in terms of its main mandate of price stability and to provide evidence to pursue green policies. We next examine the feasibility of a green monetary design under high inflation.Methods and approachWe scrutinize the duties and responsibilities of the CBRT as set by law and set out the armoury it would have at its disposal in pursuing a green monetary policy. Exhibiting climate change‐related risks to its mandate(s), we find one climate policy‐related and two mandate‐related reasons for the CBRT to go green, matching them with robust green instruments.FindingsAdopting a green monetary policy has the potential to improve the CBRT's ability to reach its objective of price stability. Indicating that green central banking in a high‐inflation country is more of a need than an option, we also document that greening of the monetary policy does not necessarily conflict with the broad mandates of inflation targeting and financial stability.Policy implicationsEvidence from Turkey supports the greening of the CBRT. This call is both feasible in terms of its capabilities and critical as regards fulfilling the mandate. Furthermore, by exposing carbon bias in the country's loan portfolio, our findings support aligning monetary policy with emissions‐abatement instruments, thus contributing to the overall design of Turkey's climate policies.

Carbon taxes and the geography of fossil lending

Using data on syndicated loans, we find that the introduction of a carbon tax is associated with a decline (increase) in bank lending to coal, oil, and gas companies in domestic (foreign) markets. This manifestation of tax arbitrage is particularly pronounced for banks with large fossil-lending exposures, suggesting a role for bank specialization. Lending to private companies in foreign markets increases relatively more, implying bank incentives to avoid public scrutiny. We also find that banks reallocate a relatively larger share of their fossil loan portfolio to countries with less strict environmental regulation and bank supervision.

CURRENT CHALLENGES AND PROSPECTS OF LOAN PORTFOLIO QUALITY MANAGEMENT IN WARTIME: THE CASE OF UKRAINE

The purpose of the study is to develop effective ways to solve the problems of managing the quality of the loan portfolio of the Ukrainian banking sector in the context of the financial crisis caused by the russian-Ukrainian war. In the course of the study, such scientific methods as fundamental provisions of the credit portfolio theory, multifactor regression analysis, extrapolation, trend analysis, mathematical programming, etc. have been used. A methodical approach to the study of contemporary problems and prospects of loan portfolio quality management under martial law, consisting in modelling the profitability of the Ukrainian banking sector, taking into account the quality of the loan portfolio, has been proposed. This approach is implemented by constructing a two-factor power regression equation; forecasting with the establishment of confidence intervals and the development of 3 forecast scenarios (realistic, pessimistic and optimistic); solving the target function to maximize the profit of the banking sector, taking into account the restrictions formed on the basis of forecasting results. A power model of dependence of Ukrainian banking sector profitability on the volume of loan portfolio and non-performing loans has been built and its statistical significance has been established on the basis of official statistics for 2012–2022. It has been determined that an increase in the volume of the bank loan portfolio by 1% leads to an increase in bank income by 3.1%, while an increase in the volume of non-performing loans by 1% leads to a 0.28% reduction in revenues of the banking sector of Ukraine. The loan portfolio and NPL series have been extrapolated to 2023–2025, which is consistent with the medium-term, as long-term projections would be unreliable under martial law and deep recession. According to the results of medium-term forecasting and optimization, it has been proved that the maximum growth of bank revenues by 60.4%, compared to 2022, is possible with an increase in the loan portfolio by 18.9%, a reduction of non-performing loans by 26% and a reduction of their share in the loan portfolio by 13.9%. It has been justified that the key condition for maximising bank revenues is the soonest termination of the russian-Ukrainian war and further expansion of effective government concessional lending programs. In particular, the effectiveness of the state program “Affordable Loans 5–7–9%”, which provided 19% of the bank loan portfolio in Ukraine and became a key mechanism of anti-crisis business support both during the COVID-19 pandemic and during the large-scale invasion from 2022 during the russian-Ukrainian war, has been substantiated.

The hazards of delivering a public loan guarantee scheme: An analysis of borrower and lender characteristics

Using data between 2009 and 2020, we provide a detailed description of the borrowers within the Enterprise Finance Guarantee (EFG) loan portfolio, analyse time to default and how it differs across lender types. For limited companies, we match additional financial and non-financial data from public and proprietary databases and profile the characteristics of EFG companies within the population of limited companies. Employing hazard models we find loans granted to unincorporated businesses by the medium-sized financial institutions are associated with a much lower hazard than those provided by smaller local lending institutions and not-for-profit agencies. Moreover, we find some evidence that loans to limited companies, issued by the big UK banking groups, have a significantly lower default than those from medium-sized financial institutions. Large banks screen out high-risk firms. We argue that smaller lenders are able to price the risks rejected by the larger banks, using a wider range of credit information. JEL codes: G01, G21, L52, D25

Exploring Financial Approaches to Evaluate Commercial Bank Profitability: An Empirical Analysis on Capital Adequacy Ratio, Loan Deposit Ratio and Non-Performing Loans

Banking is a high-risk industry since it is responsible for managing public assets and investing them in securities or loans. As a result, assessing commercial bank performance is critical for understanding their health and efficiency. A financial approach is used to assess credit risk, liquidity, and bank adequacy in accordance to the requirements of Financial Service Authority (OJK). This research aims to determine the impact of the Capital Adequacy Ratio (CAR), Loan Deposit Ratio (LDR), and Non-Performing Loans (NPL) on bank’s performance in 2017-2019. Using the purposive sampling technique, the final sample consists of 114 observations-sample. A multiple linear regression analysis was adopted on balanced panel data using the secondary data from commercial banking sector in Indonesia Stock Exchange. Chow test and Hausman test were used to finalize the findings which is to ensure that the right model to be used for the analysis. The findings demonstrate that CAR, LDR, and NPL simultaneously impact significantly the performance. However, partially only CAR and NPL show impact on the performance whilst LDR does not. The study provides implications for bank managers in managing capital and loan portfolios. It also contributes to the existing literature on bank performance.

Navigating the risk-return nexus: Unraveling the dynamics in the gross loan portfolio of microfinance institutions and its implications to sustainability and environmental impact

Navigating the risk-return nexus: Unraveling the dynamics in the gross loan portfolio of microfinance institutions and its implications to sustainability and environmental impact

Influence of Liquidity Risk Management on Financial Performance of Commercial Banks in Kenya

The management of liquidity risk in commercial banks determines the banks' financial performance, which predominantly influences the quality of the loan portfolio and the nature of credit administration programs as a whole. By ensuring that liquidity risk is effectively managed, the primary objective of liquidity risk management is to generate a high-quality, stable, large, and growing flow of net interest income for banks. This objective is achieved by ensuring that banks can meet the needs of their customers. This study determined the effect of liquidity risk management on the financial performance of Kenyan commercial banks. The investigation was founded on the theory of liquidity management shiftability. The paradigm of Positivism served as the philosophical foundation for the investigation. The study incorporated both explanatory and longitudinal research designs into its methodology. The study's target population consisted of 32 Commercial Banks in Kenya. The study utilized panel data consisting of time series and cross-sectional data spanning a decade from 2010 to 2019. Using Eviews, descriptive and inferential statistics were used to analyze the collected data, which was then presented in tables and figures. The study found out that Liquidity risk management had an insignificant negative relationship with ROE (F=0.583912, p<0.05) and ROA (F=2.770410, p<0.05). Arising from the study findings, it is observed that liquidity risk management has a negative effect on financial performance measure either in ROA or ROE, it is recommended that commercial banks should keep this parameter as minimum as possible so as not involve in loss making undertakings.

Pay for prudence

We provide the first evidence that prudential principles shape bankers' executive compensation, a phenomenon we call “pay for prudence” (PfP). We conjecture that PfP incentivizes bankers to balance shareholders' preference for risk with regulators' preference for prudence. Although PfP terms are often used in bank compensation contracts, we find that the use of detailed and concrete PfP terms are positively associated with equity incentives for risk-taking. Furthermore, detailed and concrete PfP terms are associated with lower tail risk, fewer bad loans, and lower likelihood of regulatory downgrades. While we do not find evidence that PfP is associated with lower profitability, PfP is associated with more diversified loan portfolios and reduced exposure to real estate. Our results shed light on a new dimension of bankers' pay and suggest that PfP-based incentives complement widely studied equity-based incentives for risk-taking by acting as guard rails that guide managers’ pursuit of investment opportunities.

Credit Risk Management and Loan Portfolio Performance: Evidence from Selected Banks of Bangladesh

Credit Risk Management and Loan Portfolio Performance: Evidence from Selected Banks of Bangladesh

Проблемна позичкова заборгованість суб’єктів підприємництва в сфері сільського господарства у кредитному портфелі українських банків: аналіз та оцінка зміни ключових компонентів

The purpose of the article is to analyze and evaluate the portfolio of problem loan debt of business entities in the field of agriculture and hunting. The issues of the state and dynamics of problem debt of business entities in the field of agriculture and hunting and its components in the loan portfolio of domestic banks are considered. The trends in the problem debt of business entities in the field of agriculture and hunting for the period 2009-2023 have been studied. The share of non-performing loans in the banking system of Ukraine is shown. Analyzed the volume and share of non-performing loans to agriculture and hunting by the size of the enterprise. The share of loans granted to agriculture and hunting in national and foreign currencies is estimated by the size of the enterprise. The share of non-performing loans to agriculture and hunting in national and foreign currency in the portfolio of non-performing loans by the size of the enterprise is presented. It is proved that bad debts of credit institutions are considered as an indicator of the general state of the economy. Methodological approaches to building an effective system for settling problematic debts of business entities in the field of agriculture and hunting in the bank have been developed.

Opportunities for the development of banking potential in the conditions of functioning of Novikombank

The purpose of the work is to study and identify the specifi cs of the banking potential of JSC JSCB "Novikombank" as a reference bank for the development of the Russian industrial complex. The results of Novikombank’s interaction with line ministries and departments, companies in the real sector of the economy, including organizations of the Rostec State Corporation, are summarized and systematized. On the basis of the study, the conclusions are summarized that the new model of fi nancial development of JSC JSCB "Novikombank" makes it possible to improve the processes of harmonization of the principles of lean production and consumption in the industrial production of "Rostec" Group organizations. The calculations of the dynamics and structure of the key performance indicators of Novikombank, including: the analysis of the quality of bank assets and loan portfolio. At the same time, the results of the rating assessment of the creditworthiness of JSC JSCB "Novikombank" according to accredited rating agencies presented in the article are of great importance. Conclusions and scope of the results: Formulated the definition of Novikombank’s banking potential as "a set of economic, fi nancial and managerial advantages of banking activities focused on credit diversification and balanced fi nancial intermediation in the provision of state support measures to the subjects of Russian industry". The article draws a number of conclusions about the further improvement of the banking potential of Novikombank, which has incentives for fi nancial growth through the use of internal reserves to optimize the loan portfolio. Eff ective redistribution of cash fl ows allows the bank under study to diversify the instruments of fi nancial support for manufacturing companies that contribute to the increase in gross value added when creating civilian products and products of the Russian military-industrial complex.

A research agenda on portfolio diversification, government regulations, and the financial performance of deposit-taking SACCOs in Nairobi County, Kenya

The purpose of this study is to examine the relationship between portfolio diversification, government regulations, and the financial performance of DT SACCOs in Nairobi County, Kenya. It aims to determine the impact of financial asset investment on the financial performance of deposit-taking SACCOs in Nairobi County, Kenya; the impact of loan portfolios on the financial performance of deposit-taking SACCOs in Nairobi County; and the moderating effect of government regulations on the relationship between portfolio diversification and the financial performance of deposit-taking SACCOs in Nairobi County, Kenya. Capital market theory, modern portfolio theory, risk aversion theory, arbitrage portfolio theory, and decision-making theory will serve as the study's foundation. For the period under review, secondary data will be collected from audited annual financial statements included in SASRA reports.

ANALYSIS OF THE LARGEST BANK OF KAZAKHSTAN – JSC «HALYK BANK OF KAZAKHSTAN»

Banks are an integral part of the modern monetary economy, their activities are related to the needs of reproduction. Banks form the basis of the market mechanism by which the country's economy operates. Commercial banks are designed to regulate the flow of all cash flows, primarily credit, to help ensure the most rational use of society's financial resources and the flow of capital to those sectors of the country's economy where the return on investment will be maximum. Determining the real state of the Bank is of great importance not only for the Bank itself, but also for numerous shareholders and depositors. They should be confident in the financial well-being of a particular Bank, the development of which brings them real benefits.Modern economic analysis is the basis for an objective assessment of the Bank's performance and management decision - making. In this regard, there is a need for in-depth research in the field of banking, as well as understanding of domestic and foreign experience.This article provides an analysis of the financial condition of Halyk Bank of Kazakhstan JSC: an assessment of the main financial indicators of the Bank, an analysis and assessment of changes in the capital of Halyk Bank of Kazakhstan JSC. In addition, the analysis of changes in customer funds and the analysis of changes in the Bank's obligations was carried out. The article also considers the analysis of the Bank's loan portfolio and its share in the total loan portfolio of STB, considers and pranalizes the income and expenses of Halyk Bank of Kazakhstan JSC.

The impact of Non-Performing Loans on the Banks’ Profitability

The global financial system after and during the financial crisis had to face the major issue which has extremely influence their profitability: The Non-Performing Loans portfolio (NPLs).
 The present study aims to reveal the interrelation and the possible impact of the NPLs to the profitability indicators of the Greek banks and specifically how they affect the profitability of the banks.
 The empirical investigation of included a comparative study of Financial ratios of certain Greek banks were calculated in order to reveal the impact of Non-Performing loans to their profitability for the year 2017.
 Interest income on loans is positive for all Banks but with a wide variation, while Interest-Expenses show an asymmetric distribution. Overdue loans for more than 90 days show uniformity with the exception of Piraeus Bank which shows an extreme price. The correlation between ROA and ROE with loans is not statistically significant.
 The effect on the Equity of loans in all forms except regulated is considered statistically significant. The negative effect of NPLs for more than 90 days on Net Profit before Tax is considered statistically significant.
 
 JEL Classifications: G210, D140, G300, O160
 Key words: Non- Performing loans, Greek Banks, Profitability, Credit risk, Legal frame of NPLs

Effect of Financial Innovations on Banks’ Loan Portfolio: A Case of Commercial Banks in Kenya

Purpose: The study sought to investigate the effect of financial innovations on loan portfolio of Commercial Banks in Kenya. The main problem was that even though banks have implemented financial innovations, the level of loans uptake in terms of volume and quality remains unclear as indicated by opposing findings by different studies. Most past studies on Kenya have covered relatively shorter study periods which may not reliably capture the financial trends, more so given the short shelf life of financial studies caused by rapid changes in the financial sector. 
 Methodology: This study adopted Positivism philosophy. It was based on correlational research design. The target population for the study comprised of all of the 42 commercial banks licensed by the Central Bank of Kenya to provide financial and other banking services in Kenya. Purposive sampling technique was used to select the sample of 12 CMA / NSE listed banks. Secondary data was used. They were obtained from audited financial reports of listed commercial banks, CMA and the CBK in the period 2007 to 2017. The data was analyzed using fixed effect and pooled regression of panel data analysis.
 Results: The findings of the study indicated that there is positive and significant effect between financial innovation and loan portfolio of commercial banks. The findings indicated that the overall R-squared was 0.5928. This means that on average, 59.28 percent of all variations in loans are explained by financial innovation, holding all other factors constant. This indicates that if the banks in Kenya implemented more financial innovations, the financial performance measured by loan portfolio would increase. Based on the findings, the study concluded that commercial banks have implemented technological innovations in various areas such as EFT, Branch networking and Mobile banking which have improved the banks’ loan portfolios.
 Unique contribution to theory, practice and policy: The study recommended that Commercial banks should adopt financial innovations that would positively influence loan portfolio. It shall signal the government, policy institutions, industry players and stakeholders to re-strategize finance-oriented innovations with the view to improve policy framework in order to streamline the financial sector, especially banking. The study offers literature and data for academic reference as well as guidance for investment by banks and other investors

Credit Risk Analysis and Microfinance Loan Quality in Rwanda: A Case Study of Cooperative COPEDU Ltd

The key objective of Microfinance Institutions (MFIs), like any other business organization is to maximize profits. However, the increased rates of non-performing loans (NPLs) hinder microfinance institutions from achieving their main objective. This study aimed to examine the effect of credit risk analysis on the quality loan portfolio of Microfinance Institutions in Rwanda. The credit risk analysis was measured using collection policy, loan policy and client credit appraisal. On the other hand, the loan quality portfolio was measured by Non-performing Assets (NPAs). A descriptive research design was used to describe the relationship between the study variables. A total of 30 respondents consisting of managers and credit officers were purposively selected. Data was collected from primary and secondary sources using questionnaires and financial reports. Data was analyzed by using both descriptive and inferential statistics. The results from the survey indicated that all aspects of credit risk management have got an effect on the quality loan portfolio, as evidenced by an R-square of 34.8% and a P-value of 0.01. Findings further revealed that poorly formulated Credit policy and lack of monitoring of loans through inadequate loan appraisal and loan collection procedures were identified as the main causes of Non-Performing Loans (NPLs), at 43.3%; 66.7%; 53.3%, respectively, further evidenced by the P-values of 0.01,0.012 and 0.000. The researchers further found that management decisions, conditions, and procedures have the greatest effect on non-performing loans at M=4.30; SD .887; and M=4.23; SD= .679, respectively. To address the danger of non-performing loans in the MFIs, the following measures were recommended to the management of COPEDU LTD. Effective monitoring of loans, credit training programs, tight security requirements and seeking the services of credit reference bureau and committed debt collectors.

Managing the risk of embedded options in non-traded credit using portfolio modeling

A framework for measuring and managing the risk of embedded options in non-traded credit is developed. For typical bank clients there is no market information related to their ability to pay (bond or CDS spreads) available. The absence of market information is a key assumption of this paper. In this case, a bank has to rely solely on statistical data to judge the credit quality of a borrower. To value a loan with embedded options like prepayment rights, a model is proposed that combines an interest rate derivatives pricing model with statistical information on default and recovery rates. Using this for evaluating the risk of embedded options in loans, it is shown how the concepts of credit risk management can be applied after defining a suitable concept of risk. It turns out that this modeling framework combines the theories of derivatives pricing and credit risk modeling in the sense that derivatives pricing theory measures the costs for hedging optional components in loans while credit risk modeling measures the risk that these hedging costs turn out to be inadequate. This risk depends not only on the single loan’s risk characteristics but also on the dependence structure and the granularity of the total loan portfolio.

Can Chinese banks expand their loan portfolio while maintaining loan quality and profitability post-global financial crisis?

PurposeThis study aims to investigate the relationships between loan growth, loan losses and net income after the 2008 global financial crisis. This study further conducts a comparative analysis by considering the period of COVID-19.Design/methodology/approachThis study uses panel data models such as one-step system GMM, random effects, fixed effects and OLS, with a data set of 131 Chinese commercial banks from 2009 to 2020.FindingsThe study finds no significant relationship between loan growth and future loan losses. However, after adjusting loan loss by net interest income (NII-adjusted loan loss), the study reveals that loan growth in the subsequent year decreases if NII-adjusted loan loss increases. The study also demonstrates the positive effect of loan growth on net income as newly expanded loans are funded at similar costs but offered at a lower rate compared with existing loans. During COVID-19, loan growth and net income were higher than in previous years.Originality/valueThe findings suggest that Chinese banks can increase lending to support the economy without sacrificing loan quality, emphasizing the importance of maintaining and enhancing credit policies and practices. Chinese banks should also continue to refine their pricing strategies for loans and deposits. The findings also imply that China's policy responses to the impact of COVID-19 could serve as lessons for future policy decisions.

The role of liquidity in monetary policy transmission: Evidence from Indian banks1

AbstractThe role of bank liquidity in monetary policy transmission has received insufficient attention in the literature. Faced with monetary tightening, banks with more liquidity can sell off securities and protect their loan portfolios. We test this proposition using panel data for Indian banks during 2005–2020. Employing dynamic threshold panel regressions with liquid assets as the threshold variable, we show that bank lending declines with monetary policy tightening in low liquidity regimes, but not in high liquidity regimes. We also find evidence for different portfolio reallocation behaviour by banks in high versus low liquidity regimes in response to monetary policy changes.