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Determinants of non-performing loans in conventional and Islamic banks: Emerging market evidence

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  • Md. Feroz Khan
  • Md. Sumon Ali
  • Md. Naiem Hossain
  • Mithun Bairagi

Abstract

This study examines the determinants of non-performing loans (NPLs) among macroeconomic and bank-specific factors for the Islamic and conventional banking sectors in Bangladesh. We implement a dynamic panel data model with a two-stage system GMM for the period 2010-2021. Among the bank-specific factors, this study finds that return on assets, return on equity, bank size, and inefficiency help to reduce NPLs. In contrast, gross loan growth, leverage, and capital adequacy ratios contribute to increasing NPLs. Among macroeconomic determinants, inflation, and GDP growth have a significant negative impact on NPLs. Moreover, unemployment and exchange rates are also found to be significant determinants of NPLs. At the bank level, growth in gross loans reduces NPLs in Islamic banks, while the opposite is true for conventional banks. Our findings have significant implications for depositors and regulators in making appropriate decisions.

Suggested Citation

  • Md. Feroz Khan & Md. Sumon Ali & Md. Naiem Hossain & Mithun Bairagi, 2023. "Determinants of non-performing loans in conventional and Islamic banks: Emerging market evidence," Modern Finance, Modern Finance Institute, vol. 1(1), pages 56-69.
    • Handle: RePEc:bdy:modfin:v:1:y:2023:i:1:p:56-69:id:27
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    References listed on IDEAS

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    1. Beck, Roland & Jakubik, Petr & Piloiu, Anamaria, 2013. "Non-performing loans: what matters in addition to the economic cycle?," Working Paper Series 1515, European Central Bank.
    2. Vithessonthi, Chaiporn, 2016. "Deflation, bank credit growth, and non-performing loans: Evidence from Japan," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 295-305.
    3. Rifqi Muhammad & Ahsin Suluki & Peni Nugraheni, 2020. "Internal factors and non-performing financing in Indonesian Islamic rural banks," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1823583-182, January.
    4. Mejra Festiæ & Sebastijan Repina, 2009. "Financial Stability in the Baltics," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 554-576, December.
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    Cited by:

    1. Wang, Congcong & Wang, Chong & Long, Huaigang & Zaremba, Adam & Zhou, Wenyu, 2024. "Green bond credit spreads and bank loans in China," International Review of Financial Analysis, Elsevier, vol. 94(C).

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