Factors Affecting Non-Performing Loans of Commercial Banks in Malaysia

Abstract

With the economy’s growth, the banking industry expands, and the competitiveness intensifies with the increased number of banks. Nevertheless, its non-payment also leads to huge losses for banks and the country. One of the critical determinants of the banking sector's performance is the loans advanced to get the profit. Therefore, the loans and their repayments are used as the comparison. Specifically, banks note their repayments seriously, and those default loans are declared non-performing loans (NPLs). Thus, NPL indicates a country’s banking system’s health. This study investigates the factors influencing Non-Performing Loans (NPLs) in the commercial banking sector of Malaysia from 2012 to 2021. NPLs are considered a crucial indicator of the banking system's health and the overall economic health of a country. The study examines the relationship between bank-specific and macroeconomic factors and their impact on NPLs. The bank-specific factors analyzed are loan-to-deposit ratios, capital adequacy ratios, and bank size. In contrast, macroeconomic factors are unemployment, inflation, and gross domestic product. Data were collected from published annual reports, the World Bank website, and DataStream navigators for ten years from 2012 to 2021, involving 26 commercial banks in Malaysia. Data analysis includes Descriptive Analysis, Correlation, Multicollinearity, and Multiple Regression Analysis using SPSS version 20 software. The result indicates that loan-to-deposit ratio, bank size, unemployment rate, and gross domestic product significantly impact the NPLs in the Malaysian Commercial Banks industry. Meanwhile, the capital adequacy ratio and inflation rate did not affect the NPLs in Malaysia.