Page 141 - FREN-C2021 PROCEEDINGS

Domestic Credit Growth and Non-Performing Financing
Boudriga, Boulila and Jellouli (2009) performed a study on the factors influencing non-performing
loans and the potential impact of regulatory factors on credit risk exposure. They used the aggregate
banking, financial, economic and legal environment panel data of 59 countries over the period from
2002 to 2006. By using random effects panel regression analysis, the results indicated that credit
growth rate has a negative relationship with loan problems. Klein (2013) investigated the
determinants and macroeconomic performance of NPLs in Central, Eastern, and South-Eastern
Europe (CESEE) from 1998 to 2011 involving 10 banks in each of the 16 countries by using the fixed
effect and random effect model. The independent variables used in the study are credit growth rate,
inflation, unemployment rate and GDP growth rate. The empirical findings revealed that the credit
growth rate has a negative significant effect on NPLs. Espinoza and Prasad (2010) explored the
factors that influence non – performing loans (NPLs) in the Gulf Cooperation Council (GCC) banking
sector. The result revealed that there is an inverse relationship between credit growth and NPL.

Unemployment Rate and Non-Performing Financing
According to Balogh (2012), the unemployment rate has a positive impact on banks non-performing
loans. The increase in the unemployment rate captures the economic cycles leading to an increase in
the nonperforming loans rate, as well as being considered an indicator of major economic imbalance
and contributing to the rise of banking vulnerabilities. Makri et al. (2014) identified the factors
affecting the NPLs of the Euro zone’s banking systems from 2000 to 2008 before the recession. By
using data from a sample of 14 countries and the difference Generalized Method of the Moments
(GMM) estimation as the technique of analysis, the study found that the unemployment rate has a
significant positive relationship with NPLs.

Similarly, Ahlem and Fathi (2013) conducted a study on the factors influencing non-performing loans
in 85 banks in Italy, Greece and Spain over the period from 2004 to 2008. The macroeconomic
variables used in this study are GDP growth rate, unemployment rate and real interest rate. By
applying the Fixed Effect model, the empirical findings showed significant positive relationships
between the unemployment rate and NPLs.

Real Exchange Rate and Non-Performing Financing
Real Exchange Rate (RER) also gives an impact on banking performance. Several previous studies
showed and proved that the depreciation of the domestic currency had a negative impact on the
quality of the loan. Depreciation of domestic currency raises the risk and reduces bank profitability
due to a higher NPL (Demirguc-Kunt&Detrigiache, 1998; Gunsel, 2008). However, Baboucak and
Jancar (2005) who had investigated the effects of macroeconomic shocks on the quality of the
Aggregate Loan Portfolio in the Czech economy found that the real effective exchange rate
appreciation does not worsen the NPL ratio.

By using the novel panel data set, Beck, Jakubik and Piloiu (2013) investigated the macroeconomic
determinants of non-performing loans (NPLs) across 75 countries over 10 years. The authors used
dynamic panel estimators to show the relationship between the independent variables and the
dependent variable. From the regression result, it was found that the exchange rate significantly
affects NPL ratios. The direction of the effect depends on the extent of foreign exchange lending to
unhedged borrowers which is particularly high in countries with pegged or managed exchange rates.

Shingjergji (2013) studied the impact of bank-specific factors on NPLs in the Albanian banking
system over the period from 2002 to 2012. By using the OLS regression model, the empirical finding
indicated a positive relationship between real exchange rate and NPLs. According to Rulyasri,
Achsani and Mulyati (2017), the exchange rate has a positive significant effect against the growth of
NPL of the retail segment during a period of conductivity. This finding is aligned with that of Akinlo
and Emmanuel (2014) who stated that the currency exchange has a positive impact on NPL.

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