Professional Documents
Culture Documents
Non Performing Loans Corporate Governance
Non Performing Loans Corporate Governance
Non Performing Loans Corporate Governance
Abstract
This paper attempts to identify the key determinants of Non-performing Loans in Bangladesh for the listed banks.
The sample for the study includes all the listed banks from the year 2015 to 2021. Panel Data Random Effect
regression analysis has been used to assess the relationship above. The study’s findings suggest that Board Size
significantly reduces the existence of non-performing loans in Bangladesh. In addition, Capital Adequacy Ratio,
Return on Assets, Asset Turnover Ratio, GDP growth rate, Private Sector Credit Growth rate and Inflation
are a significant determinant of non-performing loan and possesses a negative relationship. From an overall
perspective, non-performing loan can be reduced through the use of larger boards, increased focus on firm specific
measures of performance and growth in private sector credit facilities. Future researches are recommended to
use additional controls for corporate governance to improve the explanatory power of the model.
Keywords: Non-Performing Loan, Corporate Governance, Panel Data, DSE (Dhaka Stock Exchange).
3.0 Methodology:
3.1 Data
Our dataset is sourced from secondary sources. We have used the annual reports published by listed banks
on their respective websites. In addition, we have also used the API of BIZDATA Insights (https://data.
bizdatainsights.com/) for data extraction, which is the country’s first complete data terminal for banks and
related industries. We have selected all the listed banks under DSE (Dhaka Stock Exchange) for our study. There
are 33 listed banks under DSE. We have dropped ICB Islamic Bank Limited from our sample due to insufficient
data. Our study period ranges from 2015 to 2021. Hence, our final sample results in 224 firm-year observations.
NPL 1.000
ATO -0.154** 0.052 -0.085 -0.170** 0.044 -0.087 0.219*** 0.221*** 1.000
SIZE 0.222*** -0.129* 0.134** 0.441*** 0.072 -0.096 -0.037 -0.513*** -0.398*** 1.000
LEV 0.103 -0.004 0.031 -0.133** -0.044 -0.215*** 0.061 -0.086 0.198*** -0.110* 1.000
GDPG 0.076 -0.021 0.077 -0.054 -0.023 -0.113* 0.100 0.098 0.228*** -0.182*** 0.126* 1.000
PCG 0.030 -0.029 -0.094 0.046 0.055 0.216*** 0.036 -0.265*** -0.315*** 0.405*** 0.007 -0.347*** 1.000
INF -0.062 0.022 0.003 -0.023 -0.033 -0.097 -0.113* 0.167** 0.239*** -0.259*** -0.069 -0.109* -0.677*** 1.000
5.0 Conclusion:
The global financial crisis, pandemic outbreak and war in recent times raised critical turmoil in the financial
ecosystem. Financial institutions are the largest capital provider in Bangladesh. The development of the capital
market depends largely on the growth of the banking industry. Contemporary scandals in the banking industry
regarding money laundering, bad loans and fund embezzlement have been long ignored. This study attempted to
assess the financial reality of the banks in terms of their capacity to manage their funds. Non-performing loans
weaken individual banks in the short run, but the long-run aftermath of such aggregated industry worsening
conditions might lead to recession. Government officials are already being instructed by the prime minister’s
office to tackle any possible financial recession in the year 2023 (Roy, 2022). Drawing reference to the previous
literature, we have tried to assess the overall health of the country’s banking system to provide for measures that
may reduce the NPL, which will, in turn, reduce the chance of any possible turmoil in the economy for the better.
Our findings suggest that larger boards are effective in reducing the chance of NPL. In addition, a higher capital
adequacy ratio can also significantly reduce the possibility of any further rise in NPL. Return on assets ratio,
asset turnover ratio, GDP growth rate, private sector credit growth and Inflation all are negatively correlated
with NPL with significance. We conclude that the more credit is infused into the economy, the more stable the
development of the listed bank’s revenue will be in the coming days. We also have reasons to believe that our
study is solely based on secondary data, which may be further clarified through the use of real-time primary data
based on the opinion of economists, policymakers and academicians. Future research should focus on the critical
areas of corporate governance that can be based on other metrics of internal monitoring.
1. Adegboye, A., Ojeka, S., & Adegboye, K. (2020). Corporate 17. Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of non-
governance structure, Bank externalities and sensitivity of non- performing loans: Evidence from Euro-area countries. Finance
performing loans in Nigeria. Cogent Economics & Finance, 8(1), research letters, 18, 116-119.
1816611. 18. Fairfield, P. M., & Yohn, T. L. (2001). Using asset turnover and profit
2. Ahmed, S., Majeed, M. E., Thalassinos, E., & Thalassinos, Y. (2021). margin to forecast changes in profitability. Review of accounting
The impact of bank specific and macro-economic factors on non- Studies, 6(4), 371-385.
performing loans in the banking sector: evidence from an emerging 19. Farhan, M., Sattar, A., Chaudhry, A. H., & Khalil, F. (2012). Economic
economy. Journal of Risk and Financial Management, 14(5), 217. determinants of non-performing loans: Perception of Pakistani
3. Aiyar, S., Calomiris, C. W., & Wieladek, T. (2015). Bank bankers. European journal of business and management, 4(19),
capital regulation: Theory, empirics, and policy. IMF Economic 87-99.
Review, 63(4), 955-983. 20. Feijó, C. A. (2011). Credit risk and macroeconomic interactions:
4. Akter, A., Hossain, M. K., Alam, M. J., & Islam, M. (2021). Do Empirical evidence from the Brazilian banking system. Modern
the attributes of audit committee explain non-performing loans? Economy, 2(05), 910.
Evidence from an emerging economy. Asia-Pacific Management 21. Ghosh, A. (2015). Banking-industry specific and regional
Accounting Journal (APMAJ), 16(3), 327-357. economic determinants of non-performing loans: Evidence from
5. Amin, A. S., Imam, M. O., & Malik, M. (2019). Regulations, US states. Journal of financial stability, 20, 93-104.
governance, and resolution of non-performing loan: Evidence 22. Ghosh, S. (2005). Does leverage influence banks’ non-performing
from an emerging economy. Emerging Markets Finance and loans? Evidence from India. Applied economics letters, 12(15),
Trade, 55(10), 2275-2297. 913-918.
6. Amin, M. I., Ahsan, A., Al Muktadir, M., Azad, M., & Rezanur, 23. Godlewski, C. J. (2005). Bank capital and credit risk taking in
R. H. B. (2021). Macroeconomic and Firm-specific Factors emerging market economies. Journal of banking Regulation, 6(2),
Influencing Non-Performing Loans in Bangladesh: A Panel Data 128-145.
Regression Approach. The Journal of Asian Finance, Economics
24. Hoechle, D. (2007). Robust standard errors for panel regressions
and Business, 8(12), 95-105.
with cross-sectional dependence. The Stata Journal, 7 (3), 281-
7. Anjom, W., & Karim, A. M. (2016). Relationship between non- 312.
performing loans and macroeconomic factors with bank specific
25. Hoggarth, G., Sorensen, S., & Zicchino, L. (2005). Stress tests of
factors: a case study on loan portfolios–SAARC countries
UK banks using a VAR approach.
perspective. ELK Asia Pacific Journal of Finance and Risk
Management, 7(2), 1-29. 26. Hosen, M., Broni, M. Y., & Uddin, M. N. (2020). What bank specific
and macroeconomic elements influence non-performing loans in
8. Ari, A., Chen, S., & Ratnovski, L. (2021). The dynamics of non-
Bangladesh? Evidence from conventional and Islamic banks. Green
performing loans during banking crises: A new database with
Finance, 2(2), 212-226.
post-COVID-19 implications. Journal of Banking & Finance, 133,
106140. 27. HU, J. L., Li, Y., & CHIU, Y. H. (2004). Ownership and non-
performing loans: Evidence from Taiwan’s banks. The Developing
9. Balagobei, S. (2019). Corporate Governance and Non–Performing
Economies, 42(3), 405-420.
Loans: Evidence From Listed Banks in Sri Lanka. International
Journal of Accounting & Business Finance, 5(1), 72-85. 28. Irawati, N., Maksum, A., Sadalia, I., & Muda, I. (2019). Financial
performance of Indonesian’s banking industry: The role of good
10. Beck, R., Jakubik, P., & Piloiu, A. (2015). Key determinants of
corporate governance, capital adequacy ratio, non-performing
non-performing loans: new evidence from a global sample. Open
loan and size. International Journal of Scientific and Technology
Economies Review, 26(3), 525-550.
Research, 8(4), 22-26.
11. Berger, A. N., & DeYoung, R. (1997). Problem loans and cost
29. Ivanović, M. (2016). Determinants of credit growth: The case of
efficiency in commercial banks. Journal of Banking & Finance, 21(6),
Montenegro. Journal of Central Banking Theory and Practice, 5(2),
849-870.
101-118.
12. Biekpe, N. (2011). The competitiveness of commercial banks in
30. Jameel, K. (2014). Crucial factors of non-performing loans
Ghana. African development review, 23(1), 75-87.
evidence from Pakistani banking sector. International Journal of
13. Boudriga, A., Taktak, N. B., & Jellouli, S. (2010). Bank specific, Scientific & Engineering Research, 5(7).
business and institutional environment determinants of banks non-
31. Kauko, K. (2012). External deficits and non-performing loans in
performing loans: evidence from mena countries. In Economic
the recent financial crisis. Economics Letters, 115(2), 196-199.
research forum, working paper (Vol. 547, pp. 1-28).
32. Khan, M. A., Siddique, A., & Sarwar, Z. (2020). Determinants
14. Chowdhury, L. A. M., Rana, T., & Azim, M. I. (2019). Intellectual
of non-performing loans in the banking sector in developing
capital efficiency and organisational performance: In the context of
state. Asian Journal of Accounting Research.
the pharmaceutical industry in Bangladesh. Journal of Intellectual
Capital. 33. Khatun, A., & Ghosh, R. (2019). Corporate governance practices
and non-performing loans of banking sector of Bangladesh:
15. Dagher, J., Dell’Ariccia, M. G., Laeven, M. L., Ratnovski, M. L., &
a panel data analysis. International Journal of Accounting and
Tong, M. H. (2016). Benefits and costs of bank capital. International
Financial Reporting, 9(2), 12-28.
Monetary Fund.
34. Kim Quoc Trung, N. (2022). Does leverage fit non-performing
16. Dell’Ariccia, G., LAEVEN, L., RATNOVSKI, L., & TONG, H.
loans in the COVID-19 pandemic–evidence from the Vietnamese
(2015). Benefits and costs of bank capital. mimeo, International
43. Manz, F. (2019). Determinants of non-performing loans: What 60. Tölö, E., & Virén, M. (2021). How much do non-performing loans
do we know? A systematic review and avenues for future hinder loan growth in Europe?. European Economic Review, 136,
research. Management review quarterly, 69(4), 351-389. 103773.
44. Mazreku, I., Morina, F., Misiri, V., Spiteri, J. V., & Grima, S. (2018). 61. Towhid, A. S. M., Havidz, S. A. H., & Alnawah, M. A. Q. A.
Determinants of the level of non-performing loans in commercial (2019). Bank-specific and macroeconomic determinants of non-
banks of transition countries. performing loans of commercial banks in Bangladesh. Dinasti
International Journal of Management Science, 1(1), 86-101.
45. Meeker, L. G., & Gray, L. (1987). A note on non-performing loans
as an indicator of asset quality. Journal of banking & finance, 11(1), 62. Umar, M., & Sun, G. (2018). Determinants of non-performing
161-168. loans in Chinese banks. Journal of Asia Business Studies.
46. Messai, A. S., & Jouini, F. (2013). Micro and macro determinants 63. Van, D. D. (2019). Money supply and inflation impact on economic
of non-performing loans. International journal of economics and growth. Journal of Financial Economic Policy.
financial issues, 3(4), 852-860. 64. Vinh, N. T. H. (2017). The impact of non-performing loans on bank
47. Partovi, E., & Matousek, R. (2019). Bank efficiency and non- profitability and lending behavior: Evidence from Vietnam. Journal
performing loans: Evidence from Turkey. Research in international of Economic Development, (JED, Vol. 24 (3)), 27-44.
Business and Finance, 48, 287-309. 65. Vogiazas, S. D., & Nikolaidou, E. (2011). Investigating the
48. Rachman, R. A., Kadarusman, Y. B., Anggriono, K., & Setiadi, R. determinants of non-performing loans in the Romanian banking
(2018). Bank-specific factors affecting non-performing loans in system: An empirical study with reference to the Greek
developing countries: Case study of Indonesia. The Journal of crisis. Economics Research International, 2011.
Asian Finance, Economics and Business, 5(2), 35-42. 66. Vouldis, A. T., & Louzis, D. P. (2018). Leading indicators of non-
49. Rajha, K. S. (2016). Determinants of non-performing loans: performing loans in Greece: the information content of macro-,
Evidence from the Jordanian banking sector. Journal of micro-and bank-specific variables. Empirical Economics, 54(3),
Finance, 4(1), 125-136. 1187-1214.
50. Roy, N. (2022, October 14). Recession in 2023: Measures Must 67. Williams, J. (2004). Determining management behaviour in
Be Taken Now. The Daily Sun. Retrieved November 5, 2022, European banking. Journal of Banking & Finance, 28(10), 2427-
from https://www.daily-sun.com/printversion/details/650103/ 2460.
Recession-in-2023:-Measures-Must-Be-Taken-Now 68. Zeng, S. (2012). Bank non-performing loans (NPLS): A dynamic
51. Roy, S., Dey, P. K., & Bhowmik, P. (2014). Non-performing loans model and analysis in China.
in private commercial banks of Bangladesh: Macro-economic Notes:
determinants and impacts. The Jahangirnagar Journal of Business 1. Bangladesh Bank Website. Banks & FIs.
Studies, 4(1).
https://www.bb.org.bd/en/index.php/financialactivity/bankfi
52. Saba, I., Kouser, R., & Azeem, M. (2012). Determinants of non