MACROECONOMIC FACTORS INFLUENCE ON NON-PERFORMING LOANS: THE CASE OF COMMERCIAL BANKS IN MALAYSIA

Given the level of Malaysian economic openness is high, the performance of the financial system especially the banking institutions is ubiquitously exposed to risks of financial stress arising from global financial uncertainty. This headwind, to some greater or lower extent, can be translated into a more challenging prospect of economic growth, price instability, as well as a slower labor market participation faced by the local economy. With greater challenge, it prompts a call towards a continuous assessment on how these uncertainties impact the stability of the banking sector, of which proxied through the performance of non-performing loans (henceforth NPLs). This paper, therefore, aims to examine the macroeconomic influences on NPLs in the case of Malaysian commercial banks. Employing autoregressive distributed lag (ARDL) and bounds testing approach, we explored whether any of these variables namely GDP growth, inflation, and unemployment rate carry informational content about changes of NPLs. Applying this cointegration test onto a dataset of macroeconomic factors and NPLs data of the period spanning from 1998 to 2018 on a quarterly basis, the result suggests that in the long run and short run, GDP growth and unemployment are correlated with the NPLs fluctuations. Inflation, on the other hand, has no correlation. More particularly, GDP growth depicted a negative relationship with NPLs, while the unemployment rate positively influences the NPLs. (C) 2019 INT TRANS J ENG MANAG SCI TECH.