Determinants of loan loss provisions on commercial banks in Malaysia

Banking literature on loan loss provisions (LLP) have analysed on several loan loss provisioning practices such as extent of earnings and capital smoothing, signalling impact on banking industry of disclosure on loan loss provisions by one bank, and time lag between credit growth and loan losses. To the best of knowledge, no literature has investigated to determine the factors determining loan loss provisions on commercial banks in Malaysia. The present factors being used to determine loan loss provisions do not accurately reflect the expected occurrence of credit losses. As a consequence, the banks do not capture loss expectations and do not continuously reassess changes in the loss expectations as the conditions affecting their borrowers may change and in financial reporting they do not represent relevantly and faithfully their true underlying credit risk conditions. The expected outcome from this study is determinants of loan loss provisions on commercial banks in Malaysia. From identifying what are the factors determining loan loss provisions and using the factors in loan loss provisioning practices will bring about loan loss provisions reflecting the expected occurrence of credit losses. In this way, in financial reporting the banks will the reliability of financial statements by accurately reflecting the credit losses expected to occur. The study will help among others, banking regulators in Malaysia to analyse whether the reported loan loss provisions of the commercial banks reflecting the expected occurrence of credit losses. More importantly, in financial reporting, it reflects underlying credit risk conditions of the banks