Determinants of non-performing loans: an empirical study of commercial banks in Malaysia

The financial crises that Malaysia had experienced highlighted the importance of a healthy and resilient banking system, the impact of non-performing loans (NPL) of banks and its link to banking crises. Although NPL is a key financial indicator extensively studied in various countries, studies on NPL of banks in Malaysia are indeed limited. This study aimed to add to the very few studies done and perhaps the first, to examine the determinants of NPL of all the commercial banks in the Malaysian banking system, comparing the differences of determinants between local and foreign-owned commercial banks. A panel data from 27 registered commercial banks in Malaysia was used to examine the determinants of NPL. The bank-specific and loans characteristics variables and key macroeconomic variables were tested using the fixed effects model on 8 local and 19 foreign commercial banks data over a 10-year time period from 2006 to 2015. The empirical results showed that profitability of banks is the significant and common determinant of NPL for all commercial banks, local and foreign. With the exception of profitability, the differences in the determinants of NPL are evident, where local banks’ NPL are influenced by liquidity, economic growth and interest-related determinants while bank size, operational efficiency, diversification and property-related determinants have impact on foreign banks’ NPL. The significance of this study is that it highlights the importance of banks’ performances, the impact of monetary policies on the local commercial banks and the quality of property-related loans and the effect of property prices on foreign commercial banks in Malaysia. By monitoring these factors, the NPL of the commercial banks in Malaysia can be maintained at a healthy level. Regulatory authorities and stakeholders can also be guided by these findings to implement policies that will strengthen the banking system, ensuring its stability and resilience against any future financial crisis