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Regulations, Governance, and Resolution of Non-Performing Loan: Evidence from an Emerging Economy

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  • Abu S. Amin
  • Mahmood Osman Imam
  • Mahfuja Malik

Abstract

How do banks resolve a severe bad loan problem in a capital-constrained, low-income economy when a government bailout is not an option? We address this question by examining new evidence from a sharp decline in bad loan ratios in a panel of conventional commercial banks in Bangladesh. On the aggregate level, the bad loan ratio in this market has dropped from 41% in 1999 to only 10% in 2012. We find that at a micro level, this dramatic improvement is associated with bank management quality and internal governance that were substantially enhanced during a decade of large-scale regulatory reforms. The bank-level findings persist even after controlling for market monitoring, bank- and industry-level factors, and macroeconomic variables. Both economic growth and financial development paved the way for banks operating in this macroeconomic environment to reduce non-performing loans over time.

Suggested Citation

  • Abu S. Amin & Mahmood Osman Imam & Mahfuja Malik, 2019. "Regulations, Governance, and Resolution of Non-Performing Loan: Evidence from an Emerging Economy," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(10), pages 2275-2297, August.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:10:p:2275-2297
    DOI: 10.1080/1540496X.2018.1523788
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    Cited by:

    1. Doddy Ariefianto, Moch. & Trinugroho, Irwan & Yustika, Ahmad Erani, 2024. "Diversification, capital buffer, ownership and credit risk management in microfinance: An investigation on Indonesian rural banks," Research in International Business and Finance, Elsevier, vol. 69(C).
    2. Shakeel Ahmed & M. Ejaz Majeed & Eleftherios Thalassinos & Yannis Thalassinos, 2021. "The Impact of Bank Specific and Macro-Economic Factors on Non-Performing Loans in the Banking Sector: Evidence from an Emerging Economy," JRFM, MDPI, vol. 14(5), pages 1-14, May.
    3. Wan-Li Zhang & Chun-Ping Chang & Yang Xuan, 2022. "The impacts of climate change on bank performance: What’s the mediating role of natural disasters?," Economic Change and Restructuring, Springer, vol. 55(3), pages 1913-1952, August.

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