Macroeconomic Determinants of Non-Performing Loans in Malaysia

Abstract

This study re-examines the macroeconomic variables those explaining the outstanding balance of non-performing loans (NPL) in Malaysia, namely interest rate, unemployment rate, output, and price level. It covers 11 financing sectors between commercial and Islamic banks, for examples, primary agriculture, electricity, gas and water supply, manufacturing, household sectors, and so on. The data covers monthly observations for the period 2019-2021. Given non-stationarity property in nature for the variables, the ordinary least square (OLS) estimator applies for the first-differenced variables. The empirical results show that higher output reduces overall NPL including of Islamic banks but is inelastic. The past NPL explains the recent outstanding balance. The macroeconomic variables explain the most for primary agriculture, construction, mining & quarrying, transport, storage & communication, and other sector. This study also provides some relevant policy implications.