Determinants of loan loss provisions of commercial banks in Malaysia

Abstract

Purpose This paper aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Malaysia. Design/methodology/approach A single-stage panel data analysis multiple regression model that contains a mixture of quantitative and qualitative elements is used. The LLPs is a dependent variable or regressor, and non-performing loan (NPL), interest income, net profit, loans and advances and gross domestic product (GDP) are the independent variables or regressor/explanatory variables. The moderating variable is “credit risk management” (CRM) and the intervening variable is “relevance and faithful representation”. Findings This paper suggests in LLPs, NPLs, interest income, loans and advances, net profit and GDP, as well as the moderating effect of CRM and the intervening effect of relevance and faithful representation, are determinants of the LLPs. The moderating variable CRM strengthens the relationship between the independent variables and the dependent variable. The intervening variable “relevance and faithful representation” brings about a more accurate reporting on the levels of the LLPs. Practical implications The association of the factors is investigated further to detect possible effect of multicollinearity and research to better understand how banks manage their risk as the current investigation is limited to banks in Malaysia. Social implications Loan loss provisioning issues of commercial banks in Malaysia are challenges for both regulators and the banking industry owing to the implementation of several new measures, the convergence with internationally accepted accounting standards and differences in loan grading and applications of different loan loss provisioning standards. Because of these challenges, Bank Negara Malaysia (the Central Bank of Malaysia) has tightened its supervision of commercial banks to ensure that banks are sufficiently and adequately provisioned. The banking sector plays a significant role, and it is important that it is resilient in the face of potential sources of systemic risk. And, like in other major ASEAN economies, the Malaysian’s financial system remains largely bank-dominated. Originality/value This study discovers whether Malaysian banks are sufficiently provisioned for the regional financial integration under the ASEAN Capital Markets Forum (ACMF) by the end of 2015, where several initiates have been initiated, including the harmonization of standards to encourage greater intra-regional investment flows and transactions and continued provisions of the much needed funds by the region’s private sectors.

Risk management and bank performance: evidence from the MENA region

“…Credit risk is measured using two variables, mainly NPLs ratio (NPLR), loan loss provision to total loans (LLPR) (Kosmidou et al , 2005; Mohd Isa et al , 2018), in addition to capital adequacy ratio (CAR), in line with Serwadda (2018). NPLR and LLPR reflect a higher credit risk exposure with a negative impact on FP (Ramlall, 2009).…”

“…While liquidity risk is defined as the inability of a bank to put up with declines in liabilities or to fund the growth in assets (Basel Committee on Banking Supervision, 2001), credit risk (or default risk) is the likelihood of a partial or complete default on the loans by the customers due to multiple credit events (Mohd Isa et al , 2018). Even though these two types of risks may exist independently, they are jointly related.…”

Do corporate governance practices restrain earnings management in banking industry? Lessons from India

“…In banks, loan loss provision forms the major part of total accruals. Prior literature shows that numerous studies have used loan loss provision to estimate earnings management (Beatty et al , 2002; Ghosh, 2007b; Cornett et al , 2009; Taktak and Mbarki, 2014; Lassoued et al , 2017; Kolsi and Grassa, 2017; Isa et al , 2018; Amidu and Issahaku, 2019; Ozili, 2019; Mangala and Singla, 2021). Apart from loan loss provision, realised securities gains and losses are also used to measure earnings management (Beatty and Harris, 1998; Beatty et al , 2002; Greiner, 2015).…”

Elucidating salespeople's market orientation, proactive service behavior and organizational culture in the B2B banking sector: a Malaysian perspective

“…Against the backdrop of increasing trade protectionism and stagnant economic growth across the globe, the banking sector faces great challenges in expanding its market size (Al-alak, 2014). The recent tightening of lending policies and deeper scrutiny over loan loss provisions by the Malaysian Central Bank have forced Malaysian banks to re-strategize their credit risk and marketing strategies (Mohd Isa et al, 2018). Since these banks largely dominate the country's financial system, its collapse might spiral into economic turmoil in a similar manner to the 1998 Asian financial crisis.…”