The Effect of Institutional Quality and Macroeconomics Variables on Non-Performing Loans in Developing Countries
Downloads
This study intends to examine how institutional quality and macroeconomic factors affect non-performing loans within developing countries in 2010–2019. The estimation results employing the Generalized Method of Moment (GMM) method reveal that the institutional quality variable with a proxy for the government effectiveness index and regulatory quality index has a significant effect with a negative coefficient on the non-performing loans ratio (NPL). Moreover, macroeconomic variables such as inflation, unemployment, and real interest rates significantly affect NPL. In contrast, economic growth has a significant negative effect on NPL. Policymakers should focus on creating effective regulations to reduce NPLs. The government can make clear, consistent, and transparent regulations to promote a strong and competitive private sector.
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277–297. https://doi.org/10.2307/2297968
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Arham, N., Salisi, M. S., Mohammed, R. U., & Tuyon, J. (2020). Impact of macroeconomic cyclical indicators and country governance on bank non-performing loans in Emerging Asia. Eurasian Economic Review, 10(4), 707–726. https://doi.org/10.1007/s40822-020-00156-z
Asian Development Bank. (2013). The Road to ASEAN Financial Integration: A Combined Study on Assessing the Financial Landscape and Formulating Milestones for Monetary and Financial Integration in ASEAN. Asian Development Bank.
Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. In Handbook of Macroeconomics (pp. 1341–1393). https://doi.org/10.1016/S1574-0048(99)10034-X
Blundell, R., & Bond, S. (1998). Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics, 87, 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Boudriga, A., Taktak, N. B., & Jellouli, S. (2010). Bank Specific, Business and Institutional Environment Determinants of Banks Nonperforming Loans: Evidence from MENA Countries (Working Paper 547).
Bouteille, S., & Coogan-Pushner, D. (2021). The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures. John Wiley & Sons.
Büyükoglu, B., Sit, A., & Eksi, I. H. (2021). Governance matters on non-performing loans: Evidence from emerging markets. PSL Quarterly Review, 74(296), 75–91. https://doi.org/10.13133/2037-3643/17486
Diwan, I., & Rodrik, D. (1992). Debt Reduction, Adjustment Lending, and Burden Sharing (NBER Working Paper No. W4007).
Farhan, M., Sattar, A., Chaudhry, A. H., & Khalil, F. (2012). Economic Determinants of Non-Performing Loans: Perception of Pakistani Bankers. European Journal of Business and Management, 4(19), 87–99. www.iiste.org
Foglia, M. (2022). Non-Performing Loans and Macroeconomics Factors: The Italian Case. Risks, 10(1), 21. https://doi.org/10.3390/risks10010021
Francis, M. (2003). Governance and Financial Fragility: Evidence from a Cross-Section of Countries (Bank of Canada Working Paper 2003-34).
Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93–104. https://doi.org/10.1016/j.jfs.2015.08.004
Giammanco, M. D., Gitto, L., & Ofria, F. (2023). Government failures and non-performing loans in Asian countries. Journal of Economic Studies, 50(6), 1158–1170. https://doi.org/10.1108/JES-06-2022-0348
Haq, R., & Zia, U. (2006). Governance and Pro-poor Growth: Evidence from Pakistan. The Pakistan Development Review, 45(4), 761–776. https://doi.org/10.30541/v45i4IIpp.761-776
Kaufmann, D., & Kraay, A. (2007). On Measuring Governance: Framing Issues for Debate. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.961624
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance Matters VIII: Aggregate And Individual Governance Indicators 1996-2008. The World Bank. https://doi.org/10.1596/1813-9450-4978
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues (Policy Research Working Paper No. 5430).
Kinda, T., Mlachila, M., & Ouedraogo, R. (2016). Commodity Price Shocks and Financial Sector Fragility (IMF Working Paper).
Kiyotaki, N. (2011). A Perspective on Modern Business Cycle Theory. Economic Quarterly, 97(3), 195–208.
Kjosevski, J., & Petkovski, M. (2021). Macroeconomic and bank-specific determinants of non-performing loans: The case of baltic states. Empirica, 48(4), 1009–1028. https://doi.org/10.1007/s10663-020-09491-5
Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance (IMF Working Paper No. 2013/072).
Koju, L., Koju, R., & Wang, S. (2019). Macroeconomic determinants of credit risks: evidence from high-income countries. European Journal of Management and Business Economics, 29(1), 41–53. https://doi.org/10.1108/EJMBE-02-2018-0032
Kuzucu, N., & Kuzucu, S. (2019). What Drives Non-Performing Loans? Evidence from Emerging and Advanced Economies during Pre- and Post-Global Financial Crisis. Emerging Markets Finance and Trade, 55(8), 1694–1708. https://doi.org/10.1080/1540496X.2018.1547877
Lee, J., Chen, K., Chang, I., & Chen, C. (2022). Determinants of non‐performing loans, firm’s corporate governance, and macroeconomic factors. International Journal of Finance & Economics, 27(1), 88–98. https://doi.org/10.1002/ijfe.2139
Lee, Y. Y., Dato Haji Yahya, M. H., Habibullah, M. S., & Mohd Ashhari, Z. (2020). Non-performing loans in European Union: Country governance dimensions. Journal of Financial Economic Policy, 12(2), 209–226. https://doi.org/10.1108/JFEP-01-2019-0027
Mankiw, N. G. (2018). Principle of Macroeconomics (8th ed.). Cengage Learning.
Mascu, S., & Pescu, M. (2016). The impact of macroeconomic factors on non-performing loans in Romania: A time series analysis. International Finance and Banking Conference, 231–239.
Messai, A. S., & Jouini, F. (2013). Micro and Macro Determinants of Non-performing Loans. International Journal of Economics and Financial Issues, 3(4), 852–860. www.econjournals.com
Mohammadi, H., Shahnoushi, N., & Ronaghi, M. (2017). The Effects of Governance Indicators on Per Capita Income, Investment and Employment in Selected Mena Countries. Iranian Economic Review, 21(2), 211–229.
Okafor, I. G., & Ezeaku, H. C. (2022). Impact Analysis of Macroeconomic Condition and Governance on Non-Performing Loans in Asia and Pacific Banking System. Caritas Journal of Management, Social Sciences and Humanities, 1(2), 36–58. www.caritasuniversityjournals.org
Ombaba, M. K. B. (2013). Assessing the Factors Contributing to Non-Performance Loans in Kenyan Banks. European Journal of Business and Management, 5(32), 155–162. www.iiste.org
Samuelson, P. A., & Nordhaus, W. D. (2009). Economics (19th ed.). McGraw-Hill.
Semia, R. (2019). The determinants of non-performing loans: Do institutions matter? A comparative analysis of the MENA and CEE countries (MPRA Paper No. 96428).
Szarowska, I. (2018). Effect of macroeconomic determinants on non-performing loans in Central and Eastern European countries. International Journal of Monetary Economics and Finance, 11(1), 20–35. https://doi.org/10.1504/IJMEF.2018.090564
Tanasković, S., & Jandrić, M. (2015). Macroeconomic and Institutional Determinants of Non-performing Loans. Journal of Central Banking Theory and Practice, 4(1), 47–62. https://doi.org/10.1515/jcbtp-2015-0004
Tatarici, L. R., Kubinschi, M. N., & Barnea, D. (2020). Determinants of Non-Performing Loans for the EEC Region. A Financial Stability Perspective. Management & Marketing. Challenges for the Knowledge Society, 15(4), 621–642. https://doi.org/10.2478/mmcks-2020-0036
Umar, M., & Sun, G. (2018). Determinants of non-performing loans in Chinese banks. Journal of Asia Business Studies, 12(3), 273–289. https://doi.org/10.1108/JABS-01-2016-0005
Wood, A., & Skinner, N. (2018). Determinants of non-performing loans: evidence from commercial banks in Barbados. The Business and Management Review, 9(3), 44–64.
World Bank. (2022). Worldwide Governance Indicator [Data set]. Https://Info.Worldbank.Org/Governance/Wgi/.
World Bank. (2023). Bank nonperforming loans to total gross loans (%) [Data set]. Https://Data.Worldbank.Org/Indicator/FB.AST.NPER.ZS.
Zheng, C., Bhowmik, P. K., & Sarker, N. (2019). Industry-Specific and Macroeconomic Determinants of Non-Performing Loans: A Comparative Analysis of ARDL and VECM. Sustainability, 12(1), 325. https://doi.org/10.3390/su12010325
Copyright (c) 2024 Muhammad Bagja Fajariyanto, Wasiaturrahma Wasiaturrahma
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
JIET (Jurnal Ilmu Ekonomi Terapan) (p-ISSN: 2541-1470; e-ISSN: 2528-1879) is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License
Authors who publish with JIET (Jurnal Ilmu Ekonomi Terapan) agree to the following terms:
- The journal allows the author to hold the copyright of the article without restrictions.
- The journal allows the author(s) to retain publishing rights without restrictions
- The legal formal aspect of journal publication accessibility refers to Creative Commons Attribution ShareAlike 4.0 International License (CC BY-SA).
