The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach

Abstract

The relationship between financial development indicators and non-performing loans (NPLs) has garnered significant attention, especially in emerging countries. The puzzle of whether financial sector development increases or decreases Non-performing Loans (NPL)s has not been resolved to the satisfaction of the curious mind. This research attempts to answer the above question by studying the asymmetric and symmetric association between financial sector development and NPLs, by utilizing the novel non-linear autoregressive distribution lag (NARDL) and the linear autoregressive distribution lag (ARDL) approach. Moreover, to make the study inclusive, we have added a series of proxies to measure financial sector development and macroeconomic vulnerabilities. Our main findings confirm that financial sector development and NPLs move together in the long run, and there is significant evidence of the asymmetric relationship. We infer that NPLs react differently to the negative and positive shocks of financial development and macroeconomic variables both in the short and long run. In the long-run positive shocks in financial intermediation, banking efficiency, banking depth, banking stability index, and banking non-interest income significantly impact the NPLs in emerging countries. The positive shocks of financial sector development (financial intermediation and size of banks) increase NPLs in emerging countries and vice-versa. Furthermore, regarding the macroeconomic variables, the positive shock of inflation, unemployment, and interest rate positively affect NPLs. The empirical analysis also concludes that in the long-run foreign bank presence is an insignificant factor affecting NPLs in the selected countries. This study emphasizes that, unlike the linear model, the non-linear model provides a more realistic and robust result by highlighting hidden asymmetries, which will help policymakers make appropriate strategic decisions.

The Influence of Industrial Output, Financial Development, and Renewable and Non-Renewable Energy on Environmental Degradation in Newly Industrialized Countries

“…In contrast, there is a negative relationship between financial development and CO 2 and trade openness and CO 2 , and the coefficient values in pooled estimation are −0.36 and −0.84 for financial development and trade openness, respectively. These negative effects of the FD are consistent with studies conducted by Khan et al [37], and our results corroborated with Sinha and Shahbaz [94], Afridi et al [95], Syed [96], and Syed et al [97] for trade openness. Furthermore, the results from FMOLS (pooled) indicated that NRE is positive but insignificant in explaining the CO 2 of the panel.…”

Financial Development and Real Gross Domestic Product in Rwanda

“…According to Aamir et al [1], the development of the financial system has a substantial impact on economic performance, evidently; the financial system of advanced economies are better compared to that in less advanced economies.…”

“…In emerging countries such as in Brazil, Russia, India, China and South Africa; the level of expanding businesses is well recognized in these nations (BRICS). In this case, financial institutors and other related companies have seen tremendous growth and support which keep improving business opportunities and room for business growth [1].…”

“…On the same note, low-income countries were expected to grow 5.1% in 2023, with forecasts downgraded in about 65% of countries [36]. While the middle class is increasingly facing high demand in terms of financial facilities with regard to lack of developed financial institutions, middle income countries are using more debts in order to meet the demand of financial services [1].…”

The Influence of Bank-Specific, Industry-Specific, and Macroeconomic Factors on Conventional Bank Performance in Indonesia

“…Financial development is essential to ensure sustainable growth in developing countries. However, proper regulation and supervision are necessary for the financial sector to develop (Syed et al, 2022a). Strong banks allocate resources and provide acceptable returns to shareholders.…”