What bank specific and macroeconomic elements influence non-performing loans in Bangladesh? Evidence from conventional and Islamic banks

Mosharrof Hosen; Mohammed Yaw Broni; Mohammad Nazim Uddin; Mosharrof Hosen; Mohammed Yaw Broni; Mohammad Nazim Uddin

doi:10.3934/GF.2020012

Green Finance

2020, Volume 2, Issue 2: 212-226. doi: 10.3934/GF.2020012

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Research article

What bank specific and macroeconomic elements influence non-performing loans in Bangladesh? Evidence from conventional and Islamic banks

1.
Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Perak Campus, 31900 Kampar, Malaysia
2.
School of Graduate Studies, International Centre for Education in Islamic Finance, 59100 Kuala Lumpur, Malaysia
3.
Department of Business Administration, International Islamic University Chittagong, 4314 Kumira, Bangladesh

Received: 06 May 2020 Accepted: 26 May 2020 Published: 01 June 2020
JEL Codes: B26, E40, G21, G32

Policymakers are usually getting worried due to the continuous increases in non-performing loans,and the situation is expected to worsen in this era of COVID-19 pandemic. It is well established that NPL is one of the key indicators of the success and stability of the banking sector. However,very little attention has been paid regarding this issue in an emerging county like Bangladesh. Therefore,the purpose of this study is to examine and evaluate the factors influencing the non-performing loans (NPLs) of conventional and Islamic banks. We performed the analysis by employing annual panel dataset of top twenty-six conventional banks and four Islamic banks in Bangladesh over the period 2014 to 2018. The Pooled Ordinary Least Square (OLS) approach is employed to investigate the impact of credit growth,loans to deposit ratio,capitalization,inefficiency,size,diversification and economic growth on non-performing loans (NPLs). The empirical results reveal strong evidence that inefficiency has a significantly positive effect on NPLs,whereas loan to deposit ratio has a negative effect on NPLs. The results suggest policymakers need to lessen bank inefficiency with a view of reducing NPL,which ultimately will enrich shareholder's value.
- non-performing loan (NPL),
- Islamic bank,
- conventional bank,
- panel regression analysis,
- COVID-19,
- Bangladesh
Citation: Mosharrof Hosen, Mohammed Yaw Broni, Mohammad Nazim Uddin. What bank specific and macroeconomic elements influence non-performing loans in Bangladesh? Evidence from conventional and Islamic banks[J]. Green Finance, 2020, 2(2): 212-226. doi: 10.3934/GF.2020012

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Abstract

Policymakers are usually getting worried due to the continuous increases in non-performing loans,and the situation is expected to worsen in this era of COVID-19 pandemic. It is well established that NPL is one of the key indicators of the success and stability of the banking sector. However,very little attention has been paid regarding this issue in an emerging county like Bangladesh. Therefore,the purpose of this study is to examine and evaluate the factors influencing the non-performing loans (NPLs) of conventional and Islamic banks. We performed the analysis by employing annual panel dataset of top twenty-six conventional banks and four Islamic banks in Bangladesh over the period 2014 to 2018. The Pooled Ordinary Least Square (OLS) approach is employed to investigate the impact of credit growth,loans to deposit ratio,capitalization,inefficiency,size,diversification and economic growth on non-performing loans (NPLs). The empirical results reveal strong evidence that inefficiency has a significantly positive effect on NPLs,whereas loan to deposit ratio has a negative effect on NPLs. The results suggest policymakers need to lessen bank inefficiency with a view of reducing NPL,which ultimately will enrich shareholder's value.

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