Determinants Of Non-Performing Loans In The Malawi Banking Sector

Default risk as evidenced by the level of Non-Performing loans (NPLs) in Malawi commercial banks has been increasing. NPLs which describe the Asset Quality of the banks is a measure of bank performance therefore it has an overall impact on the financial stability of the banks. NPLs result into funds being locked up in the unproductive sectors of the economy hence impeding economic growth and impairing economic efficiency. This study's main objective was to determine the causes of NPLs in the commercial banks of Malawi. The study used panel data from seven banks from the year 2005 to 2014 in Malawi to analyze the bank-specific, industry-specific and macroeconomic determinants of NPLs using a Generalized Methods of Moments (GMM)/Dynamic Panel model. The model employed the Arellano-Bond (1991) onestep estimation technique which provides unbiased estimators when compared to a pooled regression model. The results obtained found that all bank-specific variables (bank size, loans to total assets ratio, ownership and growth rate of loans) were statistically significant. The variable bank and loans to assets ratio had positive significance. While ownership and growth rate of loans had negative impact. The industry-specific variable lending rate was found to have a negative impact. Among the only macro-economic variables (inflation, real exchange rate and growth rate of GDP), only the growth rate of GDP was found to be statistically significant. While inflation was found to be statistically significant only after taking its one period lag.