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Investigating the factors affecting nonperforming loans in commercial banks: The case of African lower middle‐income countries

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  • Odunayo Magret Olarewaju

Abstract

A nonperforming loan refers to a loan that is not paid as and when due, and it is a significant issue that banks need to keenly consider for them to exist and be stable. There are several factors accountable for nonperforming loans; some are firm‐specific, while others are macroeconomic factors. The study of banking sector stability is a foundation of modern macroeconomic policy of a bank‐based economy. In this view, this study aims to investigate the determining factors from both perspectives. This study used the dynamic panel regression analysis on 110 commercial banks from nine countries for the years 2010–2017 and a total of 880 observations were examined. The system generalized method of moments found that lagged nonperforming loan, lending rate, capital adequacy, credit growth, cost income ratio, as well as real interest rate, were the significant factors affecting nonperforming loans in lower middle‐income countries’ banking sector. Hence, it is recommended that commercial banks ought to establish regulations to amend their policies regarding credit advancement in alignment with the factors highlighted above. Also, banks need to ensure their loaned‐out funds are dedicated to the envisioned purpose via improved credit monitoring that would spur economic sustainability.

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  • Odunayo Magret Olarewaju, 2020. "Investigating the factors affecting nonperforming loans in commercial banks: The case of African lower middle‐income countries," African Development Review, African Development Bank, vol. 32(4), pages 744-757, December.
    • Handle: RePEc:bla:afrdev:v:32:y:2020:i:4:p:744-757
    DOI: 10.1111/1467-8268.12475
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    2. Yolanda S. Stander, 2023. "The Governance and Disclosure of IFRS 9 Economic Scenarios," JRFM, MDPI, vol. 16(1), pages 1-27, January.
    3. Evans Kulu, 2023. "Financial stability gap and private investment nexus: Evidence from sub‐Saharan Africa," African Development Review, African Development Bank, vol. 35(2), pages 239-250, June.
    4. Ines Ghazouani & Nadia Basty, 2023. "Is the relationship between bank stability, competition, and intervention quality nonlinear? Evidence from North African countries," African Development Review, African Development Bank, vol. 35(1), pages 38-51, March.
    5. Abdoulganiour Almame Tinta & Erdjouman Jean Sanou, 2021. "Les Déterminants des Prêts Non Performants du Système Bancaire de l'UMOA," African Development Review, African Development Bank, vol. 33(2), pages 276-287, June.
    6. Segun Thompson Bolarinwa & Anthony Enisan Akinlo, 2022. "Determinants of nonperforming loans after recapitalization in the Nigerian banking industry: Does competition matter?," African Development Review, African Development Bank, vol. 34(3), pages 309-323, September.

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