1

CHAPTER 1

1.1 Introduction

While Commercial Banks are playing an inevitable role in accelerating sustainable national economy,
their advancement is hindered by numerous internal and external factors among which
Nonperforming loans can be described as a pivotal impediment. Nonperforming loans, a multiclass
concept that suggests classifying loans into different varieties based on the “length of overdue",
refer to those financial assets from which banks no longer receive interest and/or installment
payment as scheduled. NPLs, viewed as a typical byproduct of the financial crisis, have enormous
capability to deteriorate the intensity and duration of the financial crisis, and to complicate
macroeconomic management by bringing down investors confidence in the banking system, piling
up economic resources, and impeding the resource allocation process. In 2009, Khemraj and Pasha
conducted a study to analyze the responsiveness of NPLs to macroeconomics factors, such as real
GDP growth, inflation, and the real effective interest rate as well as bank-specific factors, such as
interest rate, Bank size, and annual growth in loans. While analyzing, the study used a regression
analysis model where the findings show that GDP growth and growth in NPLs are negatively related
and the result also specify a "negative relation between inflation and the ratio of NPLs to total loans.
The causes of NPLs are extensively featured as the lack of effective monitoring and supervision, lack
of effective lender's recourse, weakness of legal infrastructure and lack of effective debt recovery
strategies in the Indian subcontinent. Surprisingly, the NPL ratio in Bangladesh is higher compared to
the international level which is about 2.0 per cent or below where the NPL ratios in Bangladesh
stood at 9.32 per cent and 10.30 per cent in 2019 and 2018 respectively which thankfully decrease
to 8.1% in Dec 2020, compared with the ratio of 8.9 % in the previous quarter where six state-owned
commercial banks accounted for 52% of the banking sector's total non-payment loans of tk.
93,911.40 cores at the finish of December 2018. Though the NPL ratio has decreased recently in
Bangladesh, the profitability of the banks is strongly influenced by NPLs since, as per Bangladesh
Bank guideline, a certain percentage of loans are required to be kept as a provision that varies on
the length of overdue which subsequently reduces the net profit and finally decreases the
shareholder's Equity along with reducing the dividend-paying ability of the banks. Additionally, when
a loan becomes non-performing, banks are required to acquire short term borrowing from money
markets or any other alternatives to meet expenditure, to invest further or to repay the liabilities in
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time where such borrowings increase expenditure as well as negatively impact the profitability.
Reforms to the current bank management system, the creation of a dedicated banking tribunal, a
policy framework to identify unintentional and willful defaulters can be appropriate strategies to
tackle this threat. Additionally, to overcome this situation, banking sectors must work with structural
weakness, political pressure, family traditions, and governance while adhering to tight monitoring
and supervision where Bangladesh bank should be given appropriate power to establish effective
policies and to ensure immediate and plausibly sustainable enforcement of policies. In this regard,
the Bangladesh Bank, along with the Financial Institutions Division, four large state commercial
banks and the Association of Bankers is working together to find a suitable solution where
Bangladesh Bank has already recommended to amend and update Banking Companies Act,
Bankruptcy Act, Negotiable Instrument Act, Artha Rin Adalat(money loan court) act.

While conducting this study, I found some sorts of limitations. Although many banks have large
amount of nonperforming loans, but the figure is not available in their website. Since I conduct my
study based on secondary data, it creates hindrance to collect data of most problematic banks,
especially State-owned banks. Because of non-availability of data, yearly data for very small time-
span was used in this study. Therefore, it was difficult to analyze economic cycle effect. It is expected
that, with larger time-span, macroeconomic variables would provide better result.

This research program is an integral part of our MBA program. I have acquired much practical
knowledge through this program. It has given me the chance to apply the research based theoretical
knowledge in the practical field.

The structure of the paper is as follows; the first section consists of introduction, objectives of the
research, literature review and methodology, second section is the analysis and findings, Third
section is the conclusion of the research.
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1.2 Objectives of the research:

1. To know about the Non-performing loan and its current trends / status in banking sector of
Bangladesh.

2. To determine the factors related to banks and macro economy that have an impact on the Non-
Performing Loan (NPL) of commercial banks in Bangladesh.

3. To examine the effect of the internal (i.e., bank-specific variable) and external (i.e.,
macroeconomic variables) factors on the Non-Performing Loan (NPL).

4. To compare the difference between the extent of the “impact of the factors related to banks and
macro economy” on NPL of the two banking systems in Bangladesh.

1.3 Literature Review:

A large number of studies have been conducted for solving and addressing the loan default
phenomenon. A number of authors have discussed in their studies about the emergence and
accumulation of NPLs after the independence of Bangladesh commencing from the nationalization
of banks.

Lata, R. S. (2015, September) focus on an essential study entitled “Non-Performing Loan and
Profitability: The Case of State-Owned Commercial Banks in Bangladesh.” The author mainly
attempts to find out the time series scenario of NPLs, growth and provision of NPLs and relation of
NPLs with the bank’s profitability. After analysis by using econometric technique the empirical result
instructs that NPLs as a percentage of total loans of SCBs is very high, its holds more than 50% of
total NPLs of the banking industry and also it is a major factors of influencing banking profitability, it
has statistically significant negative impact on net interest income of SCBs during the study periods.

RIFAT, A. M. (2016, January–December) expressed an important idea entitled “An Analytical Study
of Determinants of Non-Performing Loans: Evidence from Non-Bank Financial Institutions (NBFIs)
of Bangladesh.”In this paper the researcher trying to find-out the determinants of non-performing
loans (NPLs) in the Non-Bank Financial Institutions (NBFIs) sectors in Bangladesh and also tested to
determine the impact of macroeconomic or firm-specific variable on classified loans. For this study in
this paper used correlation matrix and regression analysis. The result of analysis express that the
firm specific factors were more significant for nonperforming loans of Non-Bank Financial
Institutions (NBFIs).
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Rahman, B., & Jahan, N. (2018),conduct a study on ‘Roots of Non-Performing Investments (NPIs) in
Islamic banks of Bangladesh: An Empirical Study’In this paper the researcher found that an
insignificant relationship between profitability and NPLs.

Akter, R., & Roy, J. K. (2017, February) highlight in this study “The Impacts of Non-Performing Loan
on Profitability: An Empirical Study on Banking Sector of Dhaka Stock Exchange.”The authors focus
in this study to analyse the impact of non-performing loans (NPL) on profitability. The result of
analysis expresses that nonperforming loans (NPL) as a percentage of total loans on listed banks in
Dhaka Stock Exchange (DSE) is very high and they hold more than 50% of total non-performing loans
(NPL)of listed 30 banks under Dhaka Stock Exchange (DSE) during the study period and non-
performing loans (NPL) is one of the major factors of influencing banks profitability and it has
statistically significant negative impacts on profitability of listed banks during the study period.

Khanam et al. (2013, September) wrote an article on “Management of Non- Performing Loans
(NPLs) of Banks in Bangladesh: An Evaluative study.”The researchers investigate through this study
the different causes of non-performing loans, using the sample of 30 manager of selected largest
banks, there is found that the influence of politicians was perceived as the major external factors.
During the loan application process the diversion of fund by customer failed to disclose vital
information is to be consider main customer specific factors and lack of aggressive credit policy is
the banks specific factors to contribute non-performing loan in Bangladeshfor this study here use
the simple regression analysis.

Jolevska, E. D., &Andovski, I. (2015, February) conduct a study on “NON-PERFORMING LOANS IN

THE BANKING SYSTEMS OF SERBIA, CROATIA AND MACEDONIA: COMPARATIVE ANALYSIS.”The
writers of this paper mainly focus to evaluate the level of Non-performing loans (NPL) in banking
system of the three sample Balkan countries, alongside this they dedicated their special attentions
to the level of Non-performing loans (NPL) and their ratio compare to total loans. The result shows in
comparative analysis the difference of credit portfolio quality in sample countries as well as the
reasons for the deference.

Omwenga, N. K., & Omar, N. (2017) express an idea entitle “Effects of Non-Performing Loans on
the Financial Performance of Commercial Banks in Kenya.”Mainly the researchers examine through
their study the effect of non-performing loans (NPL) on the financial performance of commercials
banks in Kenya. The researchers collect data for this study mainly primary data through
questionnaires and the data are analysed by using Correlation and Regression analysis. The result of
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the analysis reveals that there is positive relationship between dependents variables and
independent variables with coefficient of determinants of 75.1. This study recommended that the
Commercial banks should encourage loan defaulter to restructure their repayments schedule
according to their comfortability to reduce non-performing loans, the Commercial banks provide
more secure loans to borrower than unsecure loans against valuable collateral and the Commercial
banks evaluate borrowers by using various parameters to reduce the bad debts.

Suryanto (2015, July) opine an idea entitled “Non -Performing Loans on Regional Development
Bank in Indonesia and Factors that Influence.”The researcher aims to analyse in this paper the non-
performance loans (NPL) at the Regional Development Bank in Indonesia and determine what are
the factors influence it. The result of analysis express that the NPL of BPD is 2.14% average that is
still on the tolerance limits set by Indonesia. The variables which are significantly affect the NPL are
the level of efficiency of banks, Mortgage interest rate and liquidity of banks.

Singh, V. R. (2016, March) focus an idea on “A Study of Non-Performing Assets of Commercial

Banks and it’s recovery in India.”The objectives of this paper are to understand NPA, the current
status and trend of NPAs of schedule banks in India, the factors contribute to NPAs, the reasons of
high impact of NPAs of schedule banks in India and its recovery of NPAs through the various number
of channels. For this study there is used secondary data. The research result shows the gross NPAs
and net NPAs of schedule commercial banks in India is increased also found that ineffective
recovery, wilful defaults and defective lending process are responsible for rising of NPAs and finally
NPAs is the causes of reducing earning capacity of banks and badly affect ROI during the study
periods of schedule banks in India.

Makri, et. al. (2013, April)opines an idea entitled “Determinants of Non-Performing Loans: The
Case of Euro zone.”They identify in this paper the factors affecting the non-performing loans (NPL)
of Euro zone’s banking systems just before the starting of recession on the Euro zone. The result of
the analysis reveals strong correlation between NPL and various macroeconomic factors such as
public debt, unemployment, annual percentage growth rate of gross domestic product and bank
specific risk such as capital adequacy ratio, rate of nonperforming loans and return on equity (ROE).

Asfaw, et.al. (2016, May) focus an idea in the article entitled “Factors Affecting Non-Performing
Loans: Case Study on Development Bank of Ethiopia Central Region.”The researchers aim in this
study to identify the major’s factors affecting the non-performing loan of Development Banks of
Ethiopia, Central Region. The finding of the analysis reveals that poor credit assessment and credit
monitoring are the major causes of the occurrence of NPL in DBE and credit size, high interest rate,
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poorly negotiated credit terms and elongated process of loan approval are the specific causes of the
non-performing loan of Development Banks of Ethiopia, Central Region.

Adeusi, S. O., Akeke, N. I., Adebisi, O. S., &Oladunjoye, O. (2014), conduct research on entitled
‘Risk management and financial performance of banks in Nigeria’, a study on the impact of credit
risk over the financial result of the commercial banks in Nigeria from 2008 to 2012. They found an
inverse relationship that was not significant between loan ratio and total advances in terms of
deposits and has revealed a negative and significant relationship between the rate of nonperforming
loans and advances with the profitability of banks.

Adhikary, B. K. (2006),conduct a research entitled, ‘Nonperforming loans in the banking sector of

Bangladesh: realities and challenges’, found that some of the reasons for the loans being non-
performing are deficiency of efficient monitoring, effective lenders' options, and effective debt
recovery strategies.

Non-Performing Loans

A non-performing loan is defined by Festic et al. (2011) that amount of past due loan which cannot
pay off as per agreed term. Non-performing loans are loans that lenders unable to recover from the
defaulters. While defaulter is the person of the firm who unable to pay the debt. It is classified loans
consist of sub-standard, doubtful debts and bad debt/losses. Non-performing loans are used as a
proxy for the measurement of the credit risk of the banking sector in the country. The inherent
feature is relatively come from financial sector; state-owned institutions and private firms that had a
large amount of credit risk (Festic et al. 2011). The burden of non-performing loans is inherited
because of idiosyncratic-level and country-level fundamentals. Idiosyncratic-level factors are
measured through financial position and statement of comprehensive income. While country-level
factors are measured via various market indicators. Firm-level characteristics are management
inefficiency, lack of experience, bad management hypothesis, diversification, risk attitude and moral
hazards, while country-level characteristics are GDP growth, a proxy of consumer price index i.e.,
inflation, real interest rate, real effective exchange rate and unemployment burdens in the country.

Development of Hypotheses

The following set of hypotheses is developed where only alternative hypotheses are listed. The null
hypotheses can be derived as per usual manner, where no relationship is expected between the
dependent and independent variables.
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H1: There is a positive and significant relationship between Lending Rate (LR) and NPLs.

H2: There is a positive and significant relationship between Loan to Deposit Ratio (LDR) and NPLs.

H3: There is a positive and significant relationship between Bank Size (BS) and NPLs.

H4: There is a positive and significant relationship between Reserve Ratio (RR) and NPLs.

H5: There is a negative and significant relationship between Profitability (ROE) and NPLs.

H6: There is a negative and significant relationship between GDP growth and NPLS.

H7: There is a positive and significant relationship between Inflation and NPLs.

1.4 Methodology

(i) Data: In this study, I have tried to know the current trends/ status of non-performing in banking
sector in Bangladesh. For this I collect secondary data for the period of 2006-2019 from Bangladesh
Bank. I have also tried to examine the internal and external factors which influence NPLs and
whether those factors have a different impact on Islamic Banks (IB) and Conventional Banks (CB). For
this, I have used secondary data for 5 Years (2015-2019) form 10 different banks. The data was
retrieved from the Bangladesh bank website and banks’ annual reports. I took 9 conventional banks
(CBs) and 4 Islamic banks (IBs) for the analysis considering the random sampling. Because of the
higher market share of commercial banks, I gave conventional banks more weight.

(ii) Statistics: The research used Statistical software 'EViews' for panel data analysis. This research
used trend analysis to know current status of NPLs, descriptive statistics, and regression model to
evaluate the relationship between dependent and independents variables. The model has been used
over time to evaluate the effect of the explanatory variables. In my study, the dependent variable is
Nonperforming loan ratio (NPL) and Lending Rate (LR), Loan to Deposit Ratio (LDR), Profitability
(ROE), Bank Size (BS), Statutory Liquidity Ratio (SLR), GDP growth, Inflation.
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Chapter 2
Analysis and Findings

2.1 Trend Analysis

To know about the Non-performing loan and its current trends / status in banking sector of
Bangladesh, I have conducted a trend analysis.

Table 2.1: Trends of total Amount of NPLs by the types of banks (In Billion Taka)
Bank Years

Types 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SCBs 115 137.9 127.6 117.5 107.6 91.7 215.2 166.1 227.6 272.8 310.3 373.3 487.0 439.9

DFIs 41.5 37.2 37.3 42.1 49.7 56.5 73.3 83.6 72.6 49.7 56.8 54.3 47.9 40.6

PCBS 43.7 49.2 57.0 61.7 64.3 72.0 130.4 143.1 184.3 253.3 230.6 294.0 381.4 441.7

FCBs 0.8 1.9 2.9 3.5 5.5 6.3 8.5 13.0 17.1 18.2 24.1 21.5 22.9 21.0

Total 201.0 226.2 224.8 224.8 227.1 226.5 427.4 405.8 501.6 594.0 621.8 743.1 939.2 943.3

Source: Annual Reports of Bangladesh Bank

Figure-2.1
Trends of Total Amount of NPLs by the types of
Banks(In Billion Taka)
1000
900
IN BILLION TAKA

800
700
600
500
400
300
200
100
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

YEAR
SCBs DFIs PCBs FCBs Total
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In above Table 2.1 and Figure 2.1 present the tabular and graphical representation of Trends of the
total Amount of NPLs by the types of banks (In Billion Taka).The SCBs has the highest increasing
trends in total amount of NPLs and second highest increasing trends for PCBs then DIFs and FCBs are
respectively since all the banking types Trends of the total Amount of NPLs is increasing (but not
increase by same amount of percentage) so that total amount of NPLs are increasing in banking
sectors in Bangladesh during the study period 2006-2019.SCBs total NPLs was 115 billion and total
NPLs of DFIs, FCBs, PCBs were 41.5, 43.7 and .8 at the end of year 2006 which shown at the table
1.1. The total NPLs of SCBs, DFIs, PCBS and FCBs were 439.9, 40.6, 441.7, and 21.0 billion are
respectively at the end of December 2019.

Table 2.2: Trends of the growth of total Amount of NPLs by the types of banks (In Percent)

Bank 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Average
Types Growth
Rate
SCBs 20 -7 -8 -8 -15 135 -23 37 20 14 20 30 -10 15.8

DFIs -10 0 13 18 14 30 14 -13 -32 14 -4.4 -12 -15 1.3

PCBs 13 16 8 4 12 81 10 29 37 -9 27.5 29.7 15.8 21

FCBs 138 53 21 57 15 35 53 32 6 32 -11 7 -8 33

Source: Annual Reports of Bangladesh Bank

Figure-2.2
Average Growth Rate of Total Amount of
NPLs by the types of Banks (in percent)
Percent

33
21
15.8

1.3
SCBS DFIS PCBS FCBS

Types of Bank
Average Growth Rate

Source: Annual Reports of Bangladesh Bank

In above Table 2.2 and Figure 2.2 present the tabular and graphical representation of Trends of the
growth of total Amount of NPLs by the types of banks (In Percent) and average growth rate of total
amount of NPLs by the types of banks. The FCBs has the highest growth rate in total amount of NPLs
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that is 33 percent and second highest growth rate 21 percent of PCBs than 15.8 percent for SCBs and
lowest average growth rate 1.3 percent of DFIs during the study period 2006- 2019. Trends of the
average growth of total Amount of NPLs by the types of banks specially SCBs, PCBs and FCBs are very
high during the study period.

Table 2.3: Trends of Gross NPLs ratio to total Loans by the types of Banks (in percent)

Bank Years
Types 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SCBs 22.9 29.9 25.4 21.4 15.7 11.3 23.9 19.8 22.2 21.5 25.0 26.5 30.0 23.9
DFIs 33.7 28.6 25.5 25.9 24.4 24.6 26.8 26.8 32.8 23.2 26.0 23.4 19.5 15.1
PCBs 5.5 5.0 4.4 3.9 3.2 2.9 4.6 4.5 4.9 4.9 4.6 4.9 5.5 5.8
FCBs 0.8 1.4 1.9 2.3 3.0 3.0 3.5 5.5 7.3 7.8 9.6 7.0 6.5 5.7
Total 13.2 13.2 10.8 9.2 7.3 6.1 10.0 8.9 9.7 8.8 9.2 9.3 10.3 9.3

Source: Annual Reports of Bangladesh Bank

Figure2.3
Trends Gross NPLs Ratio to Total Loans by the
types of Bank
40
35
30
PERCENT

25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
YEAR

SCBs DFIs PCBs FCBs Total

Source: Annual Reports of Bangladesh Bank

The table 2.3 and Figure 2.3 represent the tabular and graphical representation of trends of Gross
NPLs ratio to total loans by the types of Banks (in percent). The NPLs ratio to total loans is most
important indicators of asset quality in the loan’s portfolio and the international standard of NPLs is
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2 percent. If we look at the table 2.3 and figure 2.3 it is visualized that the DFIs had highest and PCBs
had the lowest NPLs ratio to total loans and the NPLs ratio to total loans of SCBs, FCBs are
respectively. The NPLs ratio to total loans of SCBS, DFIs, PCBs and FCBs was 22.9, 33.7, 5.5 and .8
percent respectively at the end of 2006. The NPLs ratio to total loans of SCBs, DFIs, PCBs and FCBs
was 23.9, 15.1, 5.8, and 5.7 percent respectively at the end 2019. If we look at the total NPLs ratio to
total loans in the banking sectors of Bangladesh during the study period from above graph and table
it is shown that the declining trend at 2006 it was 13.2 percent and at the end of June 2019 was 9.2
percent.

Table 2.4: Trends of Ratio of net NPL to Net total loans by the types of banks ((in percent)

Bank Years
Types 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SCBs 14.5 12.9 5.9 1.9 1.9 -0.3 12.8 1.7 6.1 9.2 11.1 11.2 11.3 6.1
DFIs 23.6 19.0 17.0 18.3 10.6 17.0 20.4 19.7 25.5 6.9 10.5 9.7 5.7 3.0
PCBs 1.8 1.4 0.9 0.45 0 0.2 0.9 0.6 0.8 0.6 0.1 0.2 0.4 -0.1
FCBs -2.6 -1.9 -2 -2.3 -1.7 -1.8 -0.9 -0.4 -0.9 -0.2 1.9 0.7 0.7 0.2
Total 7.1 5.1 2.8 1.73 1.3 0.7 4.4 2.0 2.7 2.3 2.3 2.2 2.2 1.0

Source: Annual Reports of Bangladesh Bank

Figure 2.4
Trends of Ratio of Net NPLs to Net Total Loans by the types of Banks (In Percent)
30

25

20
Percent

15

10

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
-5
Year
SCBs DFIs PCBs FCBs Total

The above table and figure show that the ratio of net NPLs (net of provisions and interest suspense)
to net total loans (net of provisions and interest suspense). Net NPL ratio of the banking sector was
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1.0 percent in December 2019. The net NPLs ratios were 6.1, 3.00, -0.1 and 0.2 percent for the SCBs,
DFIs, PCBs and FCBs respectively at the end of December 2019.

2.2 Empirical result

Descriptive Statistics:

Table below describes the variable used in this paper through their means, standard deviations,
skewness and kurtosis.

Table: Descriptive Statistics (Conventional Banks)

NON- LOAN TO
PERFORMING LENDING DEPOSIT RESERVE
LOANS RATE RATIO BANK SIZE RATIO PROFITABILITY
Mean 10.50200 9.220000 81.25600 12.86689 23.31756 10.15356
Median 5.390000 9.500000 84.74000 12.56000 17.64000 10.63000
Maximum 35.28000 12.64000 112.7800 14.84000 51.53000 19.70000
Minimum 2.080000 5.510000 37.24000 11.78000 13.51000 -19.06000
Std. Dev. 9.341747 1.554303 20.35235 0.749551 10.81295 7.322636
Skewness 1.233889 -0.483387 -0.580273 0.668971 1.202510 -1.407958
Kurtosis 3.244434 2.872936 2.401885 2.439029 3.120315 6.674347

Jarque-Bera 11.53065 1.782741 3.196138 3.946461 10.87236 40.18164

Probability 0.003134 0.410093 0.202287 0.139007 0.004356 0.000000

Sum 472.5900 414.9000 3656.520 579.0100 1049.290 456.9100

Sum Sq. Dev. 3839.803 106.2978 18225.59 24.72036 5144.477 2359.324

Observations 45 45 45 45 45 45

Table: Descriptive Statistics (Islamic Banks)

NON-
PERFORMING LOAN TO
LOANS LENDING RATE DEPOSIT RATIO BANK SIZE PROFITABILITY RESERVE RATIO
Mean 5.010500 9.324000 89.07950 12.79450 11.24650 8.514500
Median 4.600000 9.365000 89.46500 12.62000 10.46500 7.330000
Maximum 8.200000 11.43000 96.11000 14.09000 16.16000 18.50000
Minimum 3.590000 7.630000 82.77000 11.83000 7.000000 5.500000
Std. Dev. 1.372579 1.225996 2.971878 0.689099 2.515770 3.153130
Skewness 1.126656 0.144438 -0.122553 0.732732 0.760570 1.683201
Kurtosis 2.974456 1.874441 3.719140 2.252630 2.710507 6.024156

Jarque-Bera 4.231719 1.125276 0.481033 2.255123 1.998059 17.06515

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Probability 0.120530 0.569704 0.786222 0.323822 0.368237 0.000197

Sum 100.2100 186.4800 1781.590 255.8900 224.9300 170.2900

Sum Sq. Dev. 35.79549 28.55828 167.8091 9.022295 120.2529 188.9023

Observations 20 20 20 20 20 20

The mean value of NPLs shows across banks are 10.50 percent in conventional banks, and 5.01
percent in Islamic banks along with standard deviation 9.34 % and 1.37% respectively. The finding
predicts that conventional banks have higher default risk than Islamic banks. In the case of NPLs,
Islamic banks have low risk. The mean value of lending rate of both of types banks is almost same.

Regression Equation

Panel data is used for analysis.Model the generic equation as follows for Ordinary Least Square (OLS)

𝑵𝑷𝑳𝒊𝒕 = 𝜷𝟎 + 𝜷𝟏𝑳𝑹𝒊𝒕 + 𝜷𝟐𝑳𝑻𝑫𝒊𝒕 + 𝜷𝟑𝑩𝑺𝒊𝒕 +𝜷𝟑𝑺𝑳𝑹𝒊𝒕+𝜷4ROEit+𝜷5GDPit +𝜷6INFit+𝜺𝒕(1)

Description of Variables

Non-Performing Loan Ratio (NPLR)

For Non-Performing Loan, we found loans where the debtor refused to pay the scheduled payments
for a specified time. I divide Total Non-Performing Loan by Total Loan to determine the NPLR.

Lending Rate (LR)

Generally, for banks, the Lending Rate is an interest rate used by banks for their customers who are
borrowing the money from the bank. As at present, banks are using several products to increase
their income from time to time. It is very difficult to find a single LR for a bank for the whole year. I
have used interest income from loans/ total loans as a proxy for lending rates.

Loan to Deposit Ratio (LDR)

LDR is used to access the liquidity condition of a bank. Those banks are considered as strong banks
that have a good liquidity condition. I have calculated the total loan divided by total deposit to find
out LDR. For Islamic Banks, considering total investment as total loan.
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Profitability(ROE)

Profitability is defined as return on investment and is measured by the net income to total
shareholder’s equity for the period.

Bank Size (BS)

Bank size is measured by taking the natural logarithm of total assets. The Size of bank basically
considers in the analysis for the fact of diversification. Diversification is the allocating of resources in
a way that minimizes exposure to risk towards assets.

Reserve Ratio (RR)

All banks have to maintain a minimum portion of cash, gold or other liquid assets to meet the need
of their Net Demand and Time Liabilities (NDTL). Reserve Ratio is said to be the ratio of these liquid
assets to the demand and time liabilities. I have taken SLR as Reserve Ratio.

GDP growth

GDP growth is defined as the annual percentage growth rate of GDP at market prices based on
constant local currency. GDP growth rate in negative and significant correlated with NPLs. Chaibi et
al. (2015) reported that there is a negative and significant relation between GDP growth and NPLs.

Inflation

Inflation is defined as a general increase in the price of goods and services continuously. Inflation is
measured by the consumer price index reflects the annual percentage change in the cost to the
average consumers acquiring a basket of goods and services that may be fixed or changed at
specified intervals.
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OLS Estimation

To understand the relation with the overall picture of the independent variables we run the OLS for
all the banks.

Dependent Variable: NON-PERFORMING LOANS

Method: Ordinary Least Squares
Sample: 2015 – 2019
Periods included: 5
Cross-sections included: 13
Total panel (balanced) observations: 65

Variable Coefficient Std. Error t-Statistic Prob.

C 15.08718 30.51325 0.494447 0.6229

LENDING RATE 0.744886 0.557035 1.337234 0.0865
LOAN TO DEPOSIT RATIO -0.183634 0.053944 3.404143 0.0012
BANK SIZE 0.797238 1.150743 0.692802 0.0912
SLR 0.164933 0.073662 2.239057 0.0291
PROFITABILITY -0.344596 0.107156 -3.215837 0.0021
GDP GROWTH -0.896815 1.414206 -0.634147 0.0285
INFLATION -0.065412 3.129262 -0.020903 0.0834

R-squared 0.756834 Mean dependent var 8.812308

Adjusted R-squared 0.726971 S.D. dependent var 8.190267
S.E. of regression 4.279592 Akaike info criterion 5.860410
Sum squared resid 1043.950 Schwarz criterion 6.128027
Log likelihood -182.4633 Hannan-Quinn criter. 5.966003
F-statistic 25.34391 Durbin-Watson stat 0.987167
Prob(F-statistic) 0.000000

From this result it can easily be said that, there is significant relationship between dependent
variable and independent variables and null hypothesis is rejected at 10% level of significance. If 1%
increases in lending rate, NPLs rises by 0.74%. If 1% increases in loan to deposit ratio which results in
decreasing NPLs by 0.18%. NPLs rises by .80% when bank size rises by 1% which indicates that large
banks have more NPLs compare to small banks. Profitability (ROE), GDP growth, inflation have
negative relationship with NPLs. NPLs decrease in the banking sector when macroeconomic variables
like GDP, inflation increase. The value of R2 and adjusted R2 talks about the same result but there are
some kinds of facts that the value of adjusted R2 is more acceptable than R2. The more the value of
R2 or adjusted R2, the more fit the model is. The value of adjusted R2 indicates that dependent
 16

variable (NPLs) is explained almost 73% by this chosen independent variables. In other words, it can
be said that independent variables cumulatively explain 73% of the dependent variable.

2.3 Comparative Analysis of Conventional Banks and Islamic Banks

Now I want to analyse the influence of these variables separately on commercial banks and Islamic
banks. So, I have run two separate regression model to compare. The results are as below:

Regression model for conventional banks only

Dependent Variable: NON-PERFORMINGLOANS

Method: Panel Least Squares
Sample: 2015– 2019
Periods included: 5
Cross-sections included: 9
Total panel (balanced) observations: 45

Variable Coefficient Std. Error t-Statistic Prob.

C -17.0721 40.05573 -0.42621 0.6724

LENDING RATE -1.19511 0.650922 -1.83602 0.0742
LOAN TO DEPOSIT RATIO -0.17519 0.048673 -3.59936 0.0009
BANK SIZE 3.261532 1.467234 2.222912 0.0322
PROFITABILITY(ROE) -0.33986 0.115319 -2.9471 0.0055
GDP GROWTH 0.195271 1.740252 0.112209 0.9112
INFLATION 2.23718 3.954554 0.565722 0.5749

R-squared 0.806315 Mean dependent var 10.502

Adjusted R-squared 0.775733 S.D. dependent var 9.341747
S.E. of regression 4.423955 Akaike info criterion 5.95398
Sum squared resid 743.7122 Schwarz criterion 6.235016
Log likelihood -126.965 Hannan-Quinn criter. 6.058747
F-statistic 26.36581 Durbin-Watson stat 1.372371
Prob(F-statistic) 0.000000

From this result it can easily be said that lending rate, loan to deposit ratio and profitability are
negatively related to NPLs, i.e., when these variables increase NPLs for conventional banks decrease.
There is positive relation between bank size and NPLs for conventional banks. If bank size increase
by 1 unit, NPLs increase by almost 3.26 units. This result shows also that there is positive relation
between GDP growth, inflation and NPLs, i.e., when GDP growth and inflation increase, NPLs also
increase but which are not statistically significant. That is, GDP growth and inflation have no
 17

significant impact on NPLs for conventional banks. The value of adjusted R2 indicates that dependent
variable is explained 78% by these explanatory variables.

Regression analysis for Islamic banks only

Dependent Variable: NON-PERFORMINGLOANS

Method: Panel Least Squares
Sample: 2015- 2019
Periods included: 5
Cross-sections included: 4
Total panel (balanced) observations: 20

Variable Coefficient Std. Error t-Statistic Prob.

C -215.292 49.91039 -4.31358 0.002

LENDINGRATE -0.00118 0.247267 -0.00477 0.9963
LOANTODEPOSITRATIO -0.18742 0.101965 -1.83808 0.0992
BANKSIZE 19.32699 4.382781 4.409755 0.8917
RESERVERATIO -0.49131 0.110938 -4.4287 0.0017
PROFITABILITY (ROE) -0.44763 0.099729 -4.48845 0.0015
GDPGROWTH -5.12213 1.283027 -3.99223 0.0031
INFLATION 6.406649 1.353045 4.734985 0.0011

Cross-section fixed (dummy variables)

R-squared 0.907383 Mean dependent var 5.0105

Adjusted R-squared 0.804476 S.D. dependent var 1.372579
S.E. of regression 0.606928 Akaike info criterion 2.140679
Sum squared resid 3.315255 Schwarz criterion 2.688332
Log likelihood -10.4068 Hannan-Quinn criter. 2.247587
F-statistic 8.817488 Durbin-Watson stat 2.130938
Prob(F-statistic) 0.001554

From this result it can be said that lending rate and bank size have no significant impact on NPLs for
Islamic banks. Loan to deposit ratio, reserve ratio, profitability and GDP growth have negative
relation with NPLs for Islamic banks, i.e., when these variable increase NPLs for Islamic banks
decrease. The value of adjusted R2 indicates independent variables cumulatively explain 80% of the
dependent variable.
 18

CHAPTER 3

Conclusion and Recommendations

3.1 Conclusion

The economic environment of Bangladesh is strongly depending on the banking sector for a smooth
and financial intermediation while banking sector has been suffering the scare amount of bad loans.
Every year government has to provide subsidy those banks‟ economic condition is being to be poor.

In this research I found that non-performing loans (NPLs) in Bangladesh is increasing in every year at
an alarming rate which is harmful for the economy. Regulators should focus in this regard to reduce
this rate.

In order to find out the key determinants of non-performing loans of commercial banks in
Bangladesh for the period 2015-2019, this study used panel data modelling process. The
investigation revealed that lending rate, loan to deposit ratio, bank size, statutory liquidity ratio has
positive relation with non-performing loans and profitability, GDP growth, inflation have negative
association with NPLs.

I also found that GDP growth and inflation have no significant impact on NPLs for conventional
banks; it is true that last 10 years our GDP growth rate is increasing but NPLs is increasing
dramatically. It indicates that GDP growth has no impact on conventional banks.

I also found that lending rate has no significant impact on NPLs for Islamic banks and Islamic banks
have less NPL than conventional banks.

Conventional banks NPLs rate is so high which indicates that these banks have more default risk
compared to Islamic banks.
 19

3.2 Recommendations:

• Firm specific variables are more important in explaining non-performing loan than
macroeconomic variables. This indicates bad management is responsible for increase in non-
performing loan. In order to reduce NPLs, management efficiency should be increased.
• GDP growth rate and inflation are found insignificant to non-performing loan ratio for
conventional banks. This indicates firms‟ credit policy can manage the macroeconomic
impact of non-performing loan.
• Loan to deposit ratio has been negatively related to NPL, implying that firms increasing loan
amount can reduce NPL ratio. Careful observation is needed as lowering credit standard for
loan growth may result in opposite effect. Firms should be increasing loan amount for good
borrowers with efficient credit appraisal process. Demand pool loan growth will help the
financial institutions
• The banks should observe closely to the customer so that the customers are unable to divert
fund from sanction project to other areas of business;

• The banking industry should reduce fierce competitions among the banking groups for the
sanction of loans to reduce Non-performing Loans (NPLs);

• The concern authority should take the initiative to stop the unethical activities or corruption
of the banks staffs in loans sanction;

• The government of the country should take initiative to prevent the political influence to
create pressure for sanction of loans to a customer who are not eligible for those loans;

• The banks should increase the operational efficiency of operational weakness and improve
the governance of corporation on the sanction of loans;

• The banks should not sanction excessive loans and sanction a limited amount of loans to an
inexperience or inefficient customer;

• The banks should properly assess the value of asset which provided by borrower as
collaterals and assess the credit risk of a customer based on the area of the country.
 20

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