Rehman, Abdul; Mehmood, Waqas; Al-smady, Ahna Ali; A shian Sha i
A icle
Co up ion's impac on non-pe o ming loans o banks in
eme ging ma ke s: Empi ical insigh s
Resea ch in Globaliza ion
P o ided in Coope a ion wi h:
Else ie
Sugges ed Ci a ion: Rehman, Abdul; Mehmood, Waqas; Al-smady, Ahna Ali; A shian Sha i (2024) :
Co up ion's impac on non-pe o ming loans o banks in eme ging ma ke s: Empi ical insigh s,
Resea ch in Globaliza ion, ISSN 2590-051X, Else ie , Ams e dam, Vol. 9, pp. 1-9,
h ps://doi.o g/10.1016/j. esglo.2024.100241
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Co up ion’s impac on non-pe o ming loans o banks in eme ging
ma ke s: Empi ical insigh s
Abdul Rehman
a
,
*
, Waqas Mehmood
b
, Ahna Ali Alsmady
c
, A shian Sha i
d
,
e
,
a
Depa men o Managemen Sciences, Na ional College o Business Adminis a ion and Economics, Rahim Ya Khan, Pakis an
b
Resea ch Ins i u e o Humani ies &Social Sciences, Uni e si y o Sha jah, Uni ed A ab Emi a es
c
Accoun ing Depa men , Facul y o Business Adminis a ion, Uni e si y o Tabuk, Tabuk, Saudi A abia
d
Depa men o Economics and Finance, Sunway Business School, Sunway Uni e si y, Subang Jaya, Malaysia
e
Uni e si y o Economics and Human Sciences in Wa saw, Wa saw, Poland
College o In e na ional S udies, Ko ea Uni e si y, Seoul, Sou h Ko ea
ARTICLE INFO
Keywo ds:
Con ol o Co up ion
Co up ion Pe cep ion Index
Non-pe o ming Loans
Banks
Pakis an
India and Bangladesh
ABSTRACT
Pu pose: This s udy in es iga es he impac o con ol o co up ion (COC) on nonpe o ming loans (NPLs) in
Sou h Asian coun ies.
Me hodology: The p esen s udy selec ed h ee Sou h Asian coun ies (Pakis an, India, and Bangladesh) om 2000
o 2019. Fu he , he cu en esea ch employed he ixed e ec model (FEM) analysis on a sample o 81 con-
en ional banks based in Sou h Asian coun ies.
Findings: The esul e eals ha con ol o co up ion has a signi ican and nega i e associa ion wi h NPLs,
indica ing ha weak con ol o co up ion would lead o an inc ease in NPLs in he sample coun ies.
Implica ions: The indings p o ide insigh s o he policymake s in making s a egic decisions abou NPLs
ega ding con ol o co up ion impac .
O iginali y: The signi ican inc ease in NPLs is wo ying as i may unde mine banks’abili y o g an c edi and
suppo a coun y’s economic eco e y. The inc easing end o NPL a es and limi ed s udies in ela ed li e a u e
assessing NPLs in he Sou h Asian egion has mo i a ed his s udy, which examines he ex e nal and in e nal
ac o s ha may in luence NPLs.
In oduc ion
Financial ins i u ions, especially banks, ha e a ious isk exposu es
such as liquidi y, ope a ional, ma ke , and c edi isks. Managing c edi
isk is among he essen ial p ac ices o he inancial indus y because he
alue and exposu e o c edi isk a e signi ican , gi en ha i is di ec ly
linked o he ailu e o banks (Ghenimi, Chaibi, &Om i, 2017). Fo bank
s abili y, ca e ul c edi po olio managemen is essen ial because mos
ea nings come om lending ac i i ies (Adzobu, Agbloyo , &Aboagye,
2017). Nonpe o ming loans (NPLs),
1
which a e ela ed o c edi isk,
a ise when bo owe s ail o epay loans o he bank. Banks’o he
common indica o s o c edi isks a e loan loss p o ision (LLP)
2
and o al
loan (TL). The nonpe o ming loans o o al loan (NPLs/TL) a io is an
impo an indica o as i in luences he capabili y o g and new loans,
le el o capi al p o ision and bank p o i abili y (Pop, Cepoi, &Anghel,
2018). In addi ion, hey also indica e ha a highe le el o NPLs migh
delay mone a y policy ansmission and educe he e iciency o he
inancial sys em.
The global inancial c isis (GFC) o 2007–2008 igge ed a ise in he
alue o c edi isk in e ms o NPLs o he banks in he global con ex
(Ghosh, 2017b). Wi h he signi ican inc ease in c edi isk, many banks
ailed du ing he inancial c isis pe iod (Imbie owicz &Rauch, 2014).
Such eme ging issues in he banking indus y ha e p o ided a pa hway
o discussing key indica o s o NPLs (Ghosh, 2017b). In addi ion, Mak i,
Tsagkanos, and Bellas (2014) indica e ha banks in de eloped econo-
mies ha e also aced he issue o inc easing NPLs. Such an issue has
igge ed discussion in he cu en body o li e a u e o Eu opean banks
and o he coun ies. In his espec , c edi isk in e ms o NPLs has been
* Co esponding au ho .
E-mail add esses: [email p o ec ed] (A. Rehman), [email p o ec ed] (W. Mehmood), [email p o ec ed] (A. Ali Alsmady), a shian.
[email p o ec ed] (A. Sha i ).
1
A loan is ca ego ized as NPLs i p incipal paymen and/o in e es is 90 days o o e due.
2
Es ima ion o p obable loan losses.
Con en s lis s a ailable a ScienceDi ec
Resea ch in Globaliza ion
jou nal homepage: www.sciencedi ec .com/jou nal/ esea ch-in-globaliza ion
h ps://doi.o g/10.1016/j. esglo.2024.100241
Recei ed 1 May 2024; Recei ed in e ised o m 20 June 2024; Accep ed 27 July 2024
Resea ch in Globaliza ion 9 (2024) 100241
A ailable online 30 July 2024
2590-051X/© 2024 The Au ho (s). Published by Else ie L d. This is an open access a icle unde he CC BY license ( h p://c ea i ecommons.o g/licenses/by/4.0/ ).
examined by a ious s udies (Acha ya, D echsle , &Schnabl, 2014;
Imbie owicz &Rauch, 2014).
Global end o NPLs
Globally, NPL ends indica e mixed a ios among he egions whe e
he wo ld as an indica o , on he whole, shows a downwa d end om
2014 o 2017, as p esen ed in Table 1. Regionally, he Uni ed S a es and
Aus alia led he bes pe o mance since hei NPL a ios declined
consecu i ely om 2011 o 2017. The a ios we e obse ed o be he
lowes in Aus alia among all egions. Fu he mo e, he Eu opean
Union, which had highe NPL a ios han Aus alia and he U.S., only
expe ienced a downwa d end om 2012 o 2017. On he o he hand,
Sou h Asia showed an upwa d end om 2011 o 2016, whe e i s
highes a io in he egion was 9.19 % in 2016 compa ed o he wo ld’s
highes o 4.16 % in 2014. Thus, Table 1, shows consis en ly high NPL
a ios, peaking a 9.19 % in 2016, indica ing signi ican inancial s ess,
hough he e’s a sligh imp o emen o 6.06 % by 2021.
NPLs in Sou h Asia
Table 2 shows he NPL a ios o Sou h Asian coun ies (Pakis an,
India and Bangladesh) om 2007 o 2019. These h ee coun ies
ep esen almos 70 % o he en i e banking indus y in Sou h Asia. A e
he inancial c isis, Pakis an aced a se e e p oblem o inc easing NPLs.
In 2007, he NPL a io o Pakis an was 7.60 % and showed an upwa d
end om 2007 o 2011, whe e i s highes a io was obse ed a 16.21
% in 2011. Simila ly, India also aced he NPL c isis, whe ein in 2009,
he NPL a io was only 2.20 %; howe e , in 2017, i jumped o 9.98 %. In
Bangladesh, he NPL a io was mo e han 10 % in 2017. Compa ing NPLs
in all h ee coun ies, Bangladesh had he highes NPL a io in 2017,
10.41 %. On a e age, he NPL a io o Pakis an, India and Bangladesh
has inc eased om 7.83 % in 2007 o 8.90 % in 2019.
The NPL a io is ega ded as one o he indica o s o a banking c isis.
Demi güç-Kun and De agiache (1998) sugges ha i he NPLs a io in
he banking sec o in a coun y exceeds 10 % and he cos o i s eco e y
is 2 % o he GDP, i may cause a c isis. A c isis in he banking sec o may
esul in go e nmen s aking o e he banks and cus ome s wi hd awing
hei money, which may cause a bank un. NPLs a e mo e c i ical among
hese Sou h Asian coun ies because hei a e age NPL a io is e y close
o he in e na ional benchma k o he banking c isis. The na ional
benchma k o he NPL a io is se a 5 % by he banking and inance
indus y in Pakis an, India and Bangladesh. I he a io exceeds 5 %, i
may cause po en ial di icul ies in banks ha jeopa dise hei business
con inui y (RBI, 2015; SBP, 2015); (Banagladesh Bank, 2014). Howe e ,
he issue o NPLs is a signi ican challenge o banks wo ldwide because
i a ec s he sou ce o hei in e es income, especially in de eloping
coun ies and eme ging ma ke s. A high alue o he NPL a io will
bu den a bank’s balance shee s and p o i s (Balgo a, Nies, &Plekhano ,
2016). In addi ion, NPL is an essen ial p edic o o bank ailu e (Balgo a
e al., 2016). A high NPL a io is no only an indica ion o poo banks’
asse quali y bu also an indispu able measu e o a bank’s pe o mance.
This also a ec s banks’capaci y o honou hei cus ome s’deposi
obliga ions when demanded o due, causing liquidi y c ises in he
banking indus y and he whole economy (Ghosh, 2017a). This is
because banks use deposi o s’money o g an loans o he bo owe s.
The GFC 2007–2008 wi nessed an inc ease in he NPLs a ios o banks
wo ldwide (Ghosh, 2017a). Wi h he signi ican ise in NPLs, many
banks ailed du ing he 2008 inancial c isis (Imbie owicz &Rauch,
2014). Hence, in he a e ma h o he 2008 GFC, coun ies ocused mo e
on managing NPLs and de eloped s a egies o educe he p oblem. In
2017, he a e age NPLs a io in he wo ld was 3.45 %, bu in Sou h Asia,
he a io eached 8.43 %.
NPL issues ha e igge ed academic discussion, whe e exis ing
s udies on NPLs examine issues such as c edi g ow h and NPLs (Pe ic &
Konjusak, 2017), oil p ice mo emen s and NPLs (Al-Khazali &Mi zaei,
2017), ex e nal de ici and NPLs (Kauko, 2012), ca bon in ensi y loans
(CIL) and NPLs (Guan, Zheng, Hu, Fang, &Ren, 2017), indus y-speci ic,
egional economic de e minan s and NPLs (Ghosh, 2015), c edi cycle,
business cycle and NPLs (Anas asiou, 2017), egula o y capi al and NPLs
(Osei-Assibey &Asenso, 2015), and bank e iciency and NPLs (Abd
Ka im, Sok, &Hassan, 2010). In gene al, he indings o hese s udies
conclude ha oil and gas p ice changes, lending in e es a e, exchange
a e, unemploymen , sha e p ice, ROA, loan loss p o isions, in-
e iciency, size, c edi g ow h, budge de ici , c edi and business cycle,
he ca bon in ensi y o loans, and le e age a e all signi ican ac o s o
banks’NPLs.
Howe e , he issue o co up ion and NPL has ecei ed less a en ion
om p e ious s udies as co up ion may dis o he dis ibu ion o unds
om good o poo p ojec s and will a ec NPL. Conce ning his, mo al
haza d heo y s a es ha banks a e di icul o iden i y be ween bad
(high- isk) bo owe s and good (low- isk) bo owe s due o in o ma ion
asymme y, esul ing in he de elopmen o ad e se selec ion p oblems.
The highe le els o co up ion in one coun y due o mo al haza d may
gene a e p oblems wi h non-pe o ming bank loans. Empi ical s udies
by Chen, Jeon, Wang, and Wu (2015) highligh ha highe co up ion
le els will inc ease he banks’NPLs. In his espec , co up ion can be
de ined as dishones beha iou by hose in posi ions o powe , such as
manage s o go e nmen o icials, ha include gi ing o accep ing
b ibes o inapp op ia e gi s, double-dealing, unde - he- able ans-
ac ions, di e ing unds, and money launde ing. In gene al, coun ies
wi h high le els o co up ion o e mo e oppo uni ies o dis o he
c edi assessmen p ocesses and may channel banks’loans o ineligible
applican s.
Conce ning his, Pakis an has aced a signi ican issue o co up ion
o a long ime. The ypes o co up ion include b ibes, nepo ism,
i egula paymen in e u n o a ou able judgemen s, and misuse o
au ho i y o pe sonal use. Because o all hese ac o s, Pakis an is
anked 140 ou o 180 as he mos co up coun y in he wo ld
(T anspa ency In e na ional, 2022). India is also acing a signi ican
issue o co up ion, like Pakis an, whe e he ypes o co up ion in India
include bu eauc acy, embezzlemen , aud, and b ibe y. This has been
epo ed ha mo e han 62 pe cen o Indians ha e paid a b ibe o a
public o icial in hei li es (T anspa ency In e na ional, 2014).
Bangladesh also has an issue o co up ion, and he common ypes o
co up ion in Bangladesh a e inapp op ia e use o go e nmen unds,
excessi e lobbying, pil e age, and i esponsible conduc om go e n-
men o icials. Due o his, Bangladesh is anked 147 ou o 180 as he
mos co up coun y in he wo ld (T anspa ency In e na ional, 2022).
Ne e heless, limi ed s udies empi ically examine co up ion’s e ec
on NPLs in Pakis an, India, and Bangladesh. Al hough he e is a s udy by
Ahmad (2013) on co up ion and NPL in Pakis an, he s udy, howe e ,
uses he “Co up ion Pe cep ion Index”(CPI) o he measu emen o
co up ion. The limi a ion o CPI is ha his index measu es co up ion
in he public sec o only, which may no be accu a e enough o e lec all
da a abou co up ion. Con e sely, he cu en s udy uses he Con ol o
Co up ion (COC) da a om he Wo ldwide Go e nance Indica o (WGI)
co e ing co up ion measu emen o p i a e and public sec o s ia in-
e iews wi h expe s and opinion polls. In addi ion, WGI is be e
because i measu es he COC ac o using 11 da a sou ces om he CPI
and 14 o he da a sou ces no used in he CPI (Rohwe , 2009).
Addi ionally, o he s udies ocus on Cen al and Eas e n Eu ope
(CEE) (Toade e al, 2017), Mexico, Indonesia, Nige ia, and Tu key
(MINT) (Mo akinyo &Sibanda, 2016) and Associa ion o Sou heas
Asian Na ions (ASEAN) coun ies (O i, Pe e a, &Colombage 2014).
The e o e, he cu en s udy will ocus on Pakis an, India and
Bangladesh, coun ies in he Sou h Asian egion whe e he co up ion
le el is ala ming. Thus, he p esen s udy’s aim is
•To in es iga e he impac o con ol o co up ion on he NPLs o
banks in Sou h Asian coun ies.
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
2
The p esen esea ch a emp s o ill he p e ailing gap in NPL
li e a u e by in es iga ing he e ec o co up ion on NPLs o banks in
Sou h Asia, whe e hese ac o s a e no ex ensi ely in es iga ed. The
signi icance o he s udy can be obse ed wi h p ac ical and heo e ical
con ibu ions. The p ac ical signi icance will bene i he egula o y au-
ho i ies, inancial analys s, policymake s, and p ac i ione s by assis ing
hem in c ea ing a sus ainable amewo k o bank loan quali y po o-
lios. Fu he mo e, he indings o his s udy will also guide policymake s
in o mula ing mo e sound and e ec i e banking policies based on he
s ipula ed policy implica ions o he s udy. In addi ion, i will help in
iden i ying c i ical ulne abili ies and o mula ion o policies ha will
s eng hen gene al inancial s abili y.
Li e a u e e iew
Co up ion and nonpe o ming loans (NPLs)
The misuse o au ho i y o pe sonal bene i is widely known as
co up ion. I is a global poli ical, social, and economic phenomenon
mo e p e alen in de eloping economies. Co up ion is also es ablished
in conspi acy, nepo ism, embezzlemen , aud, c onyism, decei , he
misuse o public esou ces, and o he ela ed p ac ices besides ex o ion
and b ibe y, which gene ally cha ac e ise co up ion (Chen e al., 2015;
Mohd-Rashid, Mehmood, Ooi, Che Man, &Ong, 2023). The complica ed
social concep o co up ion has se ious ad e se e ec s on he de el-
opmen o socie y and he economy. Resea che s o poli ics, sociology,
and his o y ha e long ocused on his opic (Diman &Tosa o, 2017).
The e a e wo con adic o y opinions; one is g ease he wheel, and
he o he is sand he wheel. The p io opinion e eals ha an inc ease in
co up ion leads o he ise in in es men s in he banks and businesses
h ough illegal money ha inc eases he weal h o he o dina y pe son,
as he wan s o in es i o mo e p o i , which educes he NPLs and
inc eases he economic g ow h (F ied ich, 1972; Hun ing on, 1968).
Con e sely, he o he opinion e eals ha imp ope implemen a ion o
ules and egula ions causes co up ion and b ibe y o legal wo k,
which dec eases he e iciency o ins i u ional quali y, ceases economic
g ow h and inc eased NPLs (Ba e o, 1996; Tanzi &Da oodi, 1997;
Vi o, 1998). Some au ho s ound ha co up ion has a posi i e e ec on
NPL (Bouga e (2016)Chen e al. (2015); Goel and Hasan (2011), and
some ound nega i e esul s (Lee, Yahya, Habibullah, &Ashha i, 2019)
Toade , Ono ei, Popescu, and And ieș (2017) O i, Pe e a, and Colom-
bage (2014), while some ound insigni ican e ec on NPLs (Ahmad
(2013), Ozili (2018).
The s a ing a gumen o co up ion and bank-lending can be
iewed om he s udy o (LaPo a, Lopez-de-Silanes, Shlei e , &Vishny,
1998). They p esen ed a heo e ical assump ion unde he law and
inance heo y, explaining ha inancially s ong ins i u ions p o ide
he loan acili y o comple e he loan con ac s. Such en o cemen o he
legal con ac s o ces he banks o o e mo e loans, and meanwhile, hey
ha e o impose he sc eening agains hose who a e no paying he loan
amoun on ime. Howe e , in hose economies whe e co up ion is a
c i ical issue, banks a e no su e o impose and ul il he con ac s
ega ding he eco e y o he loans (Becke &S igle , 1974; LaPo a
e al., 1998). Such an unce ain si ua ion leads o low loan eco e y,
mo e loan educ ion and inc easing c edi isk in he banking sec o .
Va ious ea lie s udies conside ed he in luence o co up ion on
NPLs. Fo ins ance, Goel and Hasan (2011) examined he impac o
co up ion and NPL using a sample o 60 coun ies in 2007. Se en
ins i u ional quali y measu es we e used, including he CPI indica o o
co up ion, he au onomy o he cen al bank, Eu opean Union mem-
be ship, and he de elopmen o he inancial sec o . The esul s showed
ha highe le els o NPLs we e ound in coun ies ha a e mo e co up .
In addi ion, coun ies which a e enjoying highe g ow h a es ha e
lowe bad loans.
Pa k (2012) examined he in luence o co up ion on economic
g ow h and banking indus y soundness as calcula ed by non-
pe o ming loans (NPLs) u ilising da a om mo e han 70 coun ies,
co e ing he pe iod om 2002 o 2004. The indings sugges ed ha
co up ion wo sens he issue o nonpe o ming loans (NPLs) in he
banking indus y. Fu he mo e, co up ion dis o s he dis ibu ion o
und om good o poo p ojec s and inc ease NPLs, lowe ing he s an-
da d o p i a e in es men and, as a esul , lowe ing economic g ow h.
A s udy was conduc ed by Bouga e (2016) on how co up ion
a ec ed loan po olio (NPL) quali y in 22 de eloping na ions be ween
2008 and 2012. The s udy’s indings showed ha co up ion wo sens
he issue o NPLs. Fu he mo e, co up ion can hinde economic
de elopmen because o he misalloca ion o unds in he economy.
When analysing he subsample, he en i e sample was subdi ided o
c ea e wo g oups based on he median in ol ing highly co up and less
co up na ions. High co up g oup coun ies include Egyp , Indonesia,
India, Mexico, Philippines, Russia, Thailand, Colombia, Pe u, China,
B azil and G eece. Subsample analysis o co up ion shows ha he
impac o co up ion on NPL is mo e in highly co up g oup coun ies.
Simila o Bouga e (2016) and Chen e al. (2015) examined he in-
luence o co up ion on isk- aking beha io as calcula ed by he z-sco e
and bank NPL in 35 de eloping coun ies. The pe iod o he s udy was
om 2000 o 2012. The indings showed ha when he le el o co -
up ion inc eases, he s abili y o banks declines. Addi ionally, a bank
expe iences g ea e ulne abili y i hey become emb oiled in high- isk
schemes in economies whe e co up ion is widesp ead. Fu he mo e,
high le els o co up ion cause banks o adop isk- aking beha io
conce ning NPLs a he han adop a “sanding he wheel”s ance in he
nexus o co up ion-de elopmen . Co up ion inc eases he ola ili y in
banks’ e u ns and aises he p obabili y o bo owe s’de aul .
In he con ex o Cen al and Eas e n Eu opean (CEE) coun ies,
Toade e al. (2017) examined how he s abili y o banks (z-sco e, NPLs,
and c edi g ow h) was in luenced by co up ion be ween 2005 and
2012. Thei indings showed ha he s eng h o banks was posi i ely
impac ed by COC, esul ing in a educ ion in c edi losses om NPLs and
c edi g owing mode a ely. Fu he mo e, hese esul s emphasised he
impo ance o he na ion’s a ibu es and he bank’s s a us in shaping
co up ion’s asymme ical e ec on he bank’s s abili y. Son, Liem and
Khuong (2020) e alua e he in luence o co up ion on he banking
sec o and economic de elopmen using agg ega e da a encompassing
120 coun ies om 2004 o 2017. The indings o 3SLS eg essions
demons a e ha he associa ion be ween co up ion and NPL was
posi i e, deg ading he banking sec o ’s soundness. The e o e, he
inancial sys em becomes weak, which con i ms he “sand he wheels”
a gumen .
Jenkins, Alsha ee , and Mohamad (2021) s udy he e ec s o
na ionwide co up ion on he c edi isk o comme cial banks wi h
a ying deg ees o c edi isk. They employ he quan ile eg ession (QR)
es ima e app oach o panel da a o 191 comme cial banks, om 18
MENAP na ions, om 2011 o 2018. The s udy esul e eals ha co -
up ion conside ably magni ies he issue o bad loans om banks. Fo
economies like Mexico, Indonesia, Nige ia and Tu key (MINT), Mo -
akinyo and Sibanda (2016) examined he de e minan s o NPL o he
banks in hese coun ies om 1998 o 2014. The esul s epo ed ha
co up ion posi i ely in luences bank NPLs in hese MINT coun ies.
Inc eased co up ion is he cause o ising NPLs in he banks. The e o e,
i is sugges ed ha ins i u ions should be imp o ed o elimina e co -
up ion and p omo e anspa ency.
Mu dock, Ngo, and Richie (2023) examine he impac o go e n-
men al co up ion on he pe o mance and isk o inancial en e p ises
based in he Uni ed S a es. They indica e ha a co up en i onmen is
linked o dec eased bank pe o mance wi hou a concu en dec ease in
isk. Majo inancial ins i u ions o en misjudge he ise in c edi isk.
Small—and medium-size banks aim o highe p o i s in co up egions
by dec easing hei liquidi y.
The s udy conduc ed by Abuzayed, Amma , Molyneux, and Al-
Fayoumi (2024) analyses a da ase o 7235 banks om 160 coun ies
spanning he yea s 2000 o 2016. They explo ed he ela ionship
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
3
be ween co up ion, lending p ac ices, and bank pe o mance. The
indings e eal ha co up ion has a posi i e e ec on bank lending, bu
i nega i ely a ec s bank ea nings and aises isks such as c edi , sol-
ency, and dis ance o de aul . Co up ion a he le el o banks signi i-
can ly impac s he pe o mance o banks in bo h de eloped and
de eloping na ions, whe eas co up ion a he le el o he coun y has a
compa a i ely less impac on lending in de eloping coun ies. The
esea ch u he e eals ha inc eased bank compe i ion, ma ke con-
cen a ion, and enhanced egula o y egimes mi iga e he impac o
co up ion on bank lending and pe o mance. Jiang and Wang (2024)
disco e ed ha banks p o ide supe io loan condi ions o bo owe s in
na ions cha ac e ised by highe le els o lending co up ion. The
s eng h o his ela ionship is enhanced when bo owe s ace limi a-
ions in ob aining unding bu weakened in na ions wi h mo e s ingen
o e sigh o o eign bank owne ship o highe le els o eligiosi y.
Addi ionally, we also ound ha banks loca ed in na ions wi h ele a ed
le els o co up ion in lending exhibi in e io loan quali y and ea nings
pe o mance, making hem mo e ulne able o di icul ies in imes o
inancial c ises.
Jungo, Madaleno, and Bo elho (2024) in es iga e he impac o
inancial inclusion and ins i u ional de e minan s, such as co up ion
and he ule o law, on he c edi isk and s abili y o banks. The indings
alida e ha enhancing inancial inclusion and bols e ing he ule o law
may make a subs an ial con ibu ion o mi iga ing c edi isk and
enhancing he inancial s abili y o banks. Con e sely, he au ho s
obse e ha inadequa e con ol o co up ion exace ba es c edi isk.
Fu he mo e, hey disco e ed ha heigh ened i al y wi hin he
banking indus y leads o an inc ease in c edi isk.
Ali, Sohail, Khan, and Puah (2019) examine he in luence o liquidi y
isk, c edi isk, inancing isk, and co up ion on he s abili y o he
banking sec o in Pakis an. The esul s o his esea ch indica e ha he
size o a bank, liquidi y isk, inancing isk, and co up ion ha e a
a ou able in luence on he s abili y o he bank. In addi ion, hey ound
a nega i e co ela ion be ween c edi isk and bank s abili y. Lisbinski
and Bu nquis (2024) examine he impac o ins i u ional ea u es on he
le el o inancial de elopmen in bo h de eloped and de eloping na-
ions. The indings om he comp ehensi e s udy indica e ha well-
de ined and s able ins i u ions ha e a c ucial ole in p omo ing inan-
cial g ow h.
Sol Mu a and Gama (2023) in es iga ed how he way co up ion is
seen a he na ional le el a ec s he lending ac i i y o comme cial
banks in Eu ope. They speci ically ocused on he signi icance o loans
and he quali y o loan po olios. The indings indica e ha co up ion
has a de imen al e ec on he signi icance o loans in bank asse s and a
a ou able e ec on he pe cen age o non-pe o ming loans. Fu he -
mo e, ade openness ampli ies he signi icance o loans and he p e -
alence o nonpe o ming loans. Bank lending ac i i y is in luenced by
ac o s such as he size o he bank, i s capi al, and he le el o isk. T an
(2022) examines he co ela ion be ween co up ion and co po a e isk-
aking in de eloping na ions, whe e co up ion is o en seen as he
o emos isk o public wel a e. The indings e eal a de imen al impac
o co up ion on co po a e isk- aking.
In summa y, empi ical indings om p e ious s udies indica e ha
co up ion is an impo an indica o which c ea es he p oblem o NPLs.
Co up ion a ec s bo h he demand and supply sides o he banking and
inancial ma ke . Co up ion inc eases banks’ isk as unds a e mis-
alloca ed om good o des uc i e p ojec s, e en ually educing eco-
nomic g ow h. In addi ion, p e ious s udies showed ha NPLs a e high
in co up coun ies. Thus, his mo i a es his s udy o in es iga e
u he whe he co up ion will signi ican ly impac NPLs in Sou h Asian
coun ies.
Al hough he e ha e been ex ensi e s udies es ablishing a connec ion
be ween co up ion and non-pe o ming loans wo ldwide, he e is a
signi ican lack o s udies ha explici ly examine Sou h Asian na ions.
P io s udies ha e mos ly in es iga ed his co ela ion in mo e ex ensi e
se ings o wi hin ce ain a eas such as Eu ope o eme ging ma ke s.
Ne e heless, he unique economic, poli ical, and ins i u ional dynamics
o Sou h Asia ha e no been ho oughly in es iga ed in ega d o his
issue. This gap highligh s he need o ocused esea ch o comp ehend
he impac o co up ion on non-pe o ming loans in banking sys ems o
Sou h Asian coun ies, while conside ing he pa icula challenges and
ci cums ances o he egion.
Resea ch me hodology
Fo he dependen a iable (NPLs) and bank-speci ic con ol a i-
ables, da a we e collec ed om he Da aS eam da abase, cen al bank
websi es and banks’annual epo s. Da a was ob ained om he Wo ld
Bank and Wo ldwide Go e nance Indica o s (WGI) da abase o co -
up ion. Meanwhile, da a we e collec ed om he Wo ld Bank da abase
o mac oeconomic a iables. The p esen s udy used panel da a om
2000 o 2019.
This s udy u ilises a sample o con en ional banks om h ee
coun ies in he Sou h Asian egion: namely, Pakis an, India and
Bangladesh. This zone p o ides a unique si ua ion o explo e how NPLs
we e a ec ed by co up p ac ices, coun y go e nance, and concen-
a ed loan po olios because 2017 saw he a e age a io o NPLs in he
Sou h Asian egion each 8.43 %. The se e i y o he NPLs in Sou h Asia
is wo h in es iga ing as i may expose banks ulne abili y o inancial
c isis and could ad e sely a ec he banks’ inancial s abili y, which
hampe s he good bo owe s om banks (Be nanke, Lown, &F iedman,
1991; Kanas &Molyneux, 2017).
Fu he mo e, in Sou h Asian coun ies, co up ion is mo e p e alen
in Pakis an, India and Bangladesh (GCI, 2017).
3
Conce ning his, all
coun ies in he sample sha e he same co up ion and coun y go e -
nance issues: highe co up ion and bad coun y go e nance; As o loan
po olio concen a ion, hese coun ies hea ily ocus on gi ing ou
loans o sec o s such as ex ile, indus y, and comme cial sec o s and
igno e o he economic sec o s. Pakis an, India and Bangladesh ep esen
almos 70 % o he o al banking indus y in Sou h Asia. These h ee
coun ies we e colonies o he B i ish Empi e be o e 1947, and hese
coun ies a e homogeneous in na u e because o hei cul u e and same
his o ical backg ound, and his explains why hese h ee coun ies a e
selec ed in his s udy. Cu en ly, he e a e 34 banks unde he supe i-
sion o S a e Bank o Pakis an, 86 banks unde he supe ision o Rese e
Table 1
NPL a ios ac oss he egion (%).
Region 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Wo ld 2.66 3.05 3.51 3.47 4.05 4.24 4.34 4.04 3.75 3.55 2.94
Sou h Asia 4.70 4.96 5.58 7.78 8.40 9.19 8.43 7.14 7.27 6.61 6.06
Eu opean Union 6.01 7.48 6.41 5.48 4.91 4.25 3.72 3.81 3.22 2.63 1.85
Aus alia 1.97 1.75 1.40 1.05 0.92 0.98 0.89 0.90 0.96 1.10 0.91
Uni ed S a es 3.78 3.32 2.45 1.85 1.47 1.32 1.13 0.91 0.86 1.07 0.81
Sou ce: Wo ld Bank Da abase.
3
Global Compe i i eness Index (GCI) 2017–2018, analyse 114 indica o s o
12 pilla s o he economy. Mos p oblema ic ac o o doing business is co -
up ion in Pakis an, India and Bangladesh.
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
4
Bank o India and 59 banks unde he supe ision o Bangladesh Bank.
The inal sample con ains 81 banks; 18 in Pakis an, 40 in India and 23 in
Bangladesh.
Va iable and measu emen
Dependen Va iable: Nonpe o ming loans (NPLs) is measu ed by he
a io o nonpe o ming loans o o al g oss loans, which is in line wi h
he exis ing s udies such as Al-Khazali and Mi zaei (2017) and Guan
e al. (2017). NPL is associa ed wi h he quali y o indi idual asse s and
he likelihood o de aul by bo owe s (Koch &MacDonald, 2010). Non-
pe o ming loans, acco ding o Be ge and DeYoung (1997), ha e been
gene ally ag eed as he mos accep able p oxy o p oblem loans.
Independen a iable: The con ol o co up ion (COC) is he only
independen a iable in his s udy. Following pas s udies such as,
Mehmood, Mohd-Rashid, Ahmad, &Tajuddin, (2023), Mehmood, Mohy
Ul Din, Aman-Ullah, Khan, &Fa eed, (2023), Mehmood, Mohd-Rashid,
Khalid, Aman-Ullah, &Abbas, (2022), his s udy uses he coun y-wide
co up ion le els o measu e COC. COC e e s o “cap u ing pe cep ions
o he ex en o which public powe is exe cised o p i a e gain,
including bo h pe y and g and o ms o co up ion, as well as cap u e o
he s a e by eli es and p i a e in e es s.”(Kau mann, K aay, &Mas-
uzzi, 2009). The alue o COC es ima es anges om −2.5 o 2.5,
whe e −2.5 indica es he lowes le el o COC (high le els o co up ion),
while 2.5 highligh s he maximum le el o COC (low le els o co up-
ion). The p e ious s udies sugges ha highe COC alues (lowe co -
up ion le els) will dec ease bank NPLs.
Con ol Va iables: P esen s udy used bank-speci ic and mac oeco-
nomics ac o s as con ol a iables. These con ol a iables a e bank
size, p o i abili y, capi alisa ion, income di e si ica ion, ine iciency,
GDP g ow h a e, in la ion and in e es a e.
Bank size (SIZE): The bank size is de e mined by using he “na u al
loga i hm o o al asse s”(Ben Saada, 2018; Chaibi &F i i, 2015;
Ta chouna, Ja aya, &Bou i, 2017). Bank size is pe cei ed o nega i ely
in luence nonpe o ming loans as i is belie ed ha la ge banks ha e
be e esou ces and capabili ies o eco e hei loans. La ge banks a e
mo e likely o employ mo e skilled indi iduals and ma ke powe and o
use economies o scale (Adhika y, 2006). P o i abili y (PROFIT): Pe ic
and Konjusak (2017) u ilised “ e u n on asse s”(ROA) o measu e he
bank’s pe o mance; i is e alua ed by “EBIT o o al asse s”. Fu he -
mo e, Pe ic and Konjusak (2017) indica e ha ROA has a nega i ely
signi ican impac on NPLs. The highe le els o he bank’s ea nings may
lead o lowe NPL and ice e sa. Con a y o his, good go e nance
should lead o lowe c edi isk o lowe NPL (Dimi ios, Helen, &Mike,
2016). This implies ha ROA has a nega i e associa ion wi h NPL.
Capi alisa ion (CAP): Sai -Alyous i, Saha, and Md-Rus (2018) use he
capi alisa ion a iable and measu e by equi y capi al o o al asse s. Sai -
Alyous i e al. (2018) ind ha capi alisa ion nega i ely impac s he
Banks’NPLs. The manage ial s a o banks aces mo al haza ds wi h less
capi al (low capi alisa ion) o in ol e in isky inancing (Kee on &
Mo is, 1987). This ‘mo al haza d’hypo hesis implies an in e se ela-
ionship be ween capi alisa ion and NPLs. Income Di e si ica ion
(INCD): Se e al p io s udies use he income di e si ica ion a iable ha
is analysed by he a io o non-in e es income o o al income (Ta ch-
ouna e al., 2017). This e lec s he bank’s dependence on a ious ypes
o income o he han in e es income. Ta chouna e al. (2017) ind ha
INCD nega i ely e ec on NPLs o banks.
Ine iciency (INEFF): Sai -Alyous i e al. (2018) use an ine iciency
a iable measu ed by ope a ing expenses o o al income. Sai -Alyous i
e al. (2018) ind ha ine iciency has a posi i ely signi ican in luence
on bank NPLs and gi es suppo o he “bad managemen ”hypo hesis.
High-cos ine iciency (bad managemen ) may esul in he ise o he
NPL. GDP G ow h (GDP): The GDP g ow h a iable is an economic
condi ion indica o and is measu ed by he annual g ow h a e o GDP.
Alhassan, Coleman, and Andoh (2014) sugges ha he GDP g ow h a e
nega i ely a ec s NPLs. NPLs o he banks dec ease du ing imes o high
economic g ow h. In la ion (INF): Pop e al. (2018) use an in la ion
a iable measu ed by he annual in la ion a e. In addi ion, Dimi ios
e al. (2016) exp ess ha in la ion a e can de e mine he ex en o
coun y’s NPL because i imp o es loan epaymen abili ies o he
bo owing cus ome s and makes loans cheape . In e es Ra e (IR): The
eal in e es a e calcula ed as he di e ence be ween he long- e m and
in la ion a es has been used in p e ious s udies (Cas o, 2013; Chaibi &
F i i, 2015). Acco ding o Cas o (2013), in e es a es a ec NPLs
posi i ely. A ise in in e es a es would weaken a bo owe ’s abili y o
epay deb se ice, leading o an inc ease in he alue o NPLs.
Empi ical model
The p esen s udy used s a ic panel es ima ion o es he hypo hesis.
OLS, ixed e ec and andom e ec a e used. Fo selec ing he bes
model, his s udy uns he Pool abili y F- es o selec ing he OLS o
ixed e ec models. I he p- alue o he F- es <0.05, hen ejec H
0,
and
he Fixed e ec es ima o will be supe io o OLS—B eusch-Pagan LM
es un o selec ing OLS o Random e ec . This s udy uns he Hausman
es o choose he andom e ec o ixed e ec model. Fo obus ness
analysis, he p esen s udy used Co up ion Pe cep ion Index (CPI) o
cap u e he impac o co up ion on bank NPL, which is he al e na e
measu e o co up ion (See Equa ions (1) and (2).
NPLi, =β0+β1COC +β2SIZEi, +β3PROFITi, +β4CAPi, +β5INCDi,
+β6INEFFi, +β7GDP +β8INF +β9IR +ui,
(1)
NPLi, =β0+β1CPI +β2SIZEi, +β3PROFITi, +β4CAPi, +β5INCDi,
+β6INEFFi, +β7GDP +β8INF +β9IR +ui,
(2)
Da a analysis and discussion
P elimina y esul s
Desc ip i e indings a e p esen ed in Table 3, co e ing he mean
sco e, de ia ion om he mean and minimum–maximum alue o he
a iables in he s udy. Table 3 illus a es ha o he c edi isk in he
o m o NPL, he mean sco e is 0.0629, explains ha on a e age, he
banking sec o has a mean end o abo e 6 pe cen in he o m o weak
loan pe o mance o e he whole pe iod o s udy whe e he highes le el
o NPL is eco ded 0.5156.
The dependen a iable is nonpe o ming loan as measu ed by
NPL=nonpe o ming loan/ o al loan; COC is he con ol o co up ion;
SIZE is he bank size measu ed by loga i hm o o al asse s; PROFIT is
Table 2
NPL a ios in Pakis an, India and Bangladesh.
Coun y 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Pakis an 7.60 9.10 12.20 14.75 16.21 14.47 12.99 12.27 11.36 10.06 8.43 7.97 8.58
India 2.70 2.40 2.20 2.39 2.67 3.37 4.03 4.35 5.88 9.19 9.98 9.46 9.23
Bangladesh 13.20 10.80 9.20 7.30 6.10 10.00 8.90 10.00 8.80 10.10 10.41 9.88 8.90
A e age 7.83 7.43 7.87 8.15 8.33 9.28 8.64 8.87 8.68 9.78 9.61 9.10 8.90
Sou ce: Wo ld Bank Da abase.
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
5
p o i abili y measu ed by e u n on asse s; CAP is capi alisa ion
measu ed by equi y capi al/ o al asse s; INCD is income di e si ica ion
measu ed by non-in e es income/ o al income; INEFF is ine iciency
measu ed by cos /income; GDP is g oss domes ic p oduc measu ed by
he annual g ow h a e o GDP; INF is in la ion measu ed by annual
consume p ice index; IR is in e es a e measu ed by annual eal in e es
a e.
In addi ion, he mean o COC is −0.7161, whe eas i ’s minimum and
maximum alue is −1.4965 and −0.2395, espec i ely. O e all, hese
h ee coun ies ha e weak COC showing nega i e signs o he min and
max. The bank-speci ic con ol a iables a e ep esen ed by SIZE,
PROFIT, CAP, INCD and INEFF. The mean alue o SIZE is 15.3311, wi h
a maximum alue o 20.0866. Meanwhile, he mean alue o PROFIT
and CAP is 0.0143 and 0.0779, wi h a maximum alue o 0.2350 and
0.5394, espec i ely. Fu he mo e, he mean alue o INCD is 0.1840
and INEFF mean sco e is 0.5402. GDP, INF, and IR ep esen he mac-
oeconomic con ol a iables. The o e all GDP mean alue is 0.0426,
wi h a maximum alue o 0.0704. Fo INF, he mean alue is 0.0674,
wi h a maximum alue o 0.2029. Whe eas o he IR, he a e age mean
sco e is 0.0471 wi h a maximum alue o 0.0926.
The co ela ion analysis is used o de ec mul icollinea i y among
independen a iables, which may impac hei ela ionship wi h he
dependen a iables in a eg ession analysis (Pallan , 2009). Se e e
mul icollinea i y is a signi ican issue because i aises he a iance o
eg ession coe icien s and causes hem o be uns able. Howe e , based
on he co ela ion ma ix shown in Table 4, all hese alues a e abo e
0.70, he benchma k o iden i y mul icollinea i y (Pallan , 2009).
Hence, he e is e idence o mul icollinea i y p oblems among a iables
in he model.
Mul iple eg ession analysis
Table 5 p esen s he esul s o he mul iple eg ession analysis. The
eg ession equa ion can explain 31.9 % o he a ia ion ( e lec ed
h ough R-squa e) in he dependen a iable (i.e. NPL). A he same
ime, he F-s a is ics o he equa ion is 12.58, which is signi ican a 1
pe cen . Addi ionally, he Woold idge and Wald es s’ esul s o
au oco ela ion and he e oscedas ici y yield signi ican indings a a 1 %
le el (p- alue =0.0000). Hence, o o e come he au oco ela ion and
he e oscedas ici y p oblem, -s a is ics a e compu ed using obus
s anda d e o s. The esul s show ha he coe icien s o he main
a iable o in e es , COC, a e s a is ically signi ican a a 5 % le el. In
con as , o he con ol a iables like PROFIT, GDP, and INF a e ound o
be s a is ically signi ican a a 1 % le el. Meanwhile, INEFF and IR a e
s a is ically signi ican a a 10 % le el.
The signi ican e ec o COC implies ha an inc ease in coun y-wide
co up ion, including in he banking sec o , will lead o he inapp o-
p ia e app o al o loans and make he eco e y o loans e y di icul .
This is no su p ising in he case o Sou h Asia, whe e almos all he
coun ies a e con on ed wi h a high le el o co up ion (low con ol
o e co up ion). This migh be pa icula ly ue o Sou h Asian coun-
ies, which a e acing a high le el o co up ion ( he mean o COC is
−0.7166, which shows low con ol o co up ion, ha ’s why NPL is high
in Sou h Asian coun ies). The eg ession esul indica es ha inc easing
he COC Index by 1 uni may dec ease he banks’NPL o 0.025 uni s.
The e ec o he i s con ol a iable in he analysis, bank size
(SIZE), is no s a is ically signi ican . This implies ha , on a e age, his
no ion is no suppo ed by clea e idence ha SIZE de e mines he NPL
o he selec ed banks unde he p esen s udy. This would jus i y he
a gumen ha he SIZE o he banks has no ole in de e mining he NPL.
Con e sely, he coe icien o PROFIT, which is assumed as he second
con ol a iable, is nega i ely signi ican (p- alue =0.000). This would
indica e ha a highe le el o he bank’s ea nings may lead o a lowe
le el o NPL and ice e sa. As o he economic magni ude, an inc ease
o 1 uni in ROA will dec ease 1.746 uni s in bank non-pe o ming loans
in he sample coun ies. This esul is simila o Pe ic and Konjusak
(2017) and Vi hesson hi (2016) indings. The highe le el o banking
sec o ea nings indica es a good pe o mance dynamic, esul ing in a
lowe amoun o NPL.
In addi ion, he impac o capi alisa ion (CAP) on NPL is ound o be
nega i ely insigni ican , meaning ha he e is inadequa e e idence o
ecommend ha CAP de e mines he NPL o he banks in he sample
s udied. Simila ly, income di e si ica ion (INCD) shows an insigni ican
impac on he NPLs. This implies ha , on a e age, no p ope e idence
suppo s he no ion ha INCD de e mines he nonpe o ming loans o
banks in he sample s udied. Howe e , he bank ine iciency coe icien
(INEFF) measu ed by he cos - o-income a io is posi i e and s a is ically
signi ican (p- alue =0.076), suppo ing he weak managemen hy-
po hesis. The esul implies ha a 1 uni inc ease in INEFF will inc ease
0.050 uni s in NPL. This indica es ha high-cos ine iciency (ine icien
managemen ) may inc ease he NPL.
A e analysing he e ec o bank-speci ic dynamics on NPL, he
ela ionship be ween mac oeconomic a iables and NPL is obse ed.
This is ollowed ha he impac o GDP g ow h on NPL is nega i ely
signi ican a 1 pe cen (p- alue =0.008). This esul indica es ha an
inc ease o one uni in GDP will dec ease 0.254 uni s in NPL which
sugges s ha in good economic g ow h will esul in lowe NPL and he
elimina ion o bad loans om he economy. These esul s a e consis en
wi h Pe ic and Konjusak (2017) and Alhassan e al. (2014), who
emphasise ha a good economic si ua ion in he coun y may aise he
bo owe ’s c edi wo hiness, hus leading o lowe NPL o he banking
sec o .
Simila o GDP, he impac o he second mac oeconomic a iable,
en i led in la ion (INF), shows a signi ican and nega i e coe icien a a
1 pe cen le el (p =0.000). This esul indica es ha an inc ease o one
uni in INF will esul in a 0.267 uni dec ease in NPL. This esul is
simila o he inding o Pop e al. (2018), whe e in la ion is signi ican ly
dec easing he NPL alue, and a consis en end is obse ed (Cas o,
2013). In addi ion, Dimi ios e al. (2016) also exp ess ha he in la ion
a e can de e mine he ex en o he coun y’s NPL because i imp o es
loan epaymen abili ies o he bo owing cus ome s and makes loans
cheape . Addi ionally, Ghosh (2015) a gues ha , heo e ically, in la ion
dec eases he deb alue and hus makes he se icing o deb easie .
Meanwhile, he coe icien es ima ion o in e es a e (IR) is
Table 3
Desc ip i e s a is ics o all a iables.
Va iable Mean S anda d de ia ion Min Max
NPL 0.0629 0.0618 0.0008 0.5156
COC −0.7161 0.3489 −1.4965 −0.2395
SIZE 15.3311 1.6619 2.0692 20.0866
PROFIT 0.0143 0.0167 −0.1037 0.2350
CAP 0.0779 0.0424 0.0158 0.5394
INCD 0.1840 0.0876 0.0131 0.4349
INEFF 0.5402 0.1639 0.0810 1.4050
GDP 0.0426 0.0203 −0.0060 0.0704
INF 0.0674 0.0324 0.0201 0.2029
IR 0.0471 0.0317 −0.0677 0.0926
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
6
posi i ely signi ican (p- alue =0.087). This esul would jus i y he
claim ha an inc ease o one uni in IR would inc ease o 0.087 eams in
NPL and ice e sa. This esul is simila o he inding o Louzis,
Vouldis, and Me axas (2012), Chaibi and F i i (2015), and Ta chouna
e al. (2017), who ha e claimed simila esul s whe e a signi ican and
posi i e ela ionship exis s be ween in e es a e and NPL. Fu he mo e,
hese indings align wi h he heo y ha a highe in e es a e would
lead o a highe le el o NPL, implying ha a high-in e es a e inc eases
he cos s o unds by inc easing deb se icing cos s wi h he lowe
paymen capaci y o he bo owe s as well. Meanwhile, his p omo es
he cul u e o high- isk- aking beha iou in he banking sec o , whe e
loans a e app o ed o high- isk bo owe s a a e y high-in e es a e.
Thus, hese loans mos p obably ans o med in o bad loans, hence in-
c ease NPL in he banking sec o .
Addi ional analysis
The obus ness esul s a e p esen ed in Table 6 using he co up ion
pe cep ion index. Simila o COC, he esul also shows ha CPI has a
nega i ely signi ican ela ionship wi h NPL. The esul is simila o
Toade e al. (2017), who claimed a signi ican and ad e se associa ion
be ween he CPI and NPL in he banking sec o . Addi ionally, he e ec
o bank size, p o i abili y, GDP g ow h, and in la ion is ound o be
nega i ely signi ican . This would jus i y he ea lie indings whe e i is
explained ha highe ea nings in he banking sec o lead o lowe NPL,
along wi h he nega i e e ec o economic dynamics like economic
g ow h and in la ion o lowe NPL and ice e sa.
Conclusion
To add ess he s udy’s objec i e, con ol o co up ion (COC) was
used o in es iga e he ela ionship wi h NPL. As an al e na i e measu e
o co up ion, his s udy also used he co up ion pe cep ion index (CPI)
o he obus ness es . The esul s show ha con ol o co up ion (COC)
is nega i ely ela ed o nonpe o ming loans and is signi ican o con-
en ional banks in Sou h Asian coun ies. The indings co espond o
hose o Toade e al. (2017), Pa k (2012) and Bouga e (2016), who
ound ha i co up beha iou we e poo ly con olled (i.e., co up ion
le els we e highe ), mo e non-pe o ming loans would be he ou come.
The es ima es o COC had a signi ican impac , indica ing ha i co -
up ion is p ac ised ac oss he economy, unsui able c edi and inside
c edi will be c ea ed. A he same ime, loans may be di e ed away
om schemes he c edi commi ee had app o ed. Such p ojec s may
ul ima ely be deemed “bad loans”, esul ing in a highe NPL a io. Loans
would also become mo e expensi e, so a bo owe would ind i less easy
o make epaymen s. This esul seems o sugges ha be e con ol on
co up ion in Sou h Asia has he abili y o es ic he une hical beha io
associa ed wi h co up ion du ing he 2000 o 2019 s udy pe iod,
o he wise i suppo s he inc ease o le els o nonpe o ming loans in he
con en ional banks o Sou h Asian coun ies.
Limi a ions o he s udy
This is impo an o no e a ious limi a ions. Fi s , his s udy only
examined con en ional banks as a sample. The e o e, hese esea ch
indings canno necessa ily be applied o o he o ms o banks in Sou h
Asia, like hose ocusing on in es men , coope a ion, o de elopmen .
Secondly, he s udy u ilised da a om he ope a ions o adi ional
banks only because hese ypes o banks ollow a sepa a e egula o y
sys em om Islamic banks. Fu he mo e, Islamic banks we e omi ed
because hey a e ew in numbe , and mos banks we e es ablished in
ecen yea s, whe e su icien da a is una ailable. Thi d, his esea ch
p ima ily concen a ed on he Sou h Asian banking sec o . Hence, he
indings a e es ic ed o he NPLs o Sou h Asian banks and do no
ep esen he NPLs o banks in o he de eloping and de eloped na ions.
The esul s a e also limi ed o he s udy pe iod o 2000 o 2019. Fou h,
Table 4
Co ela ion ma ix.
Va iables NPL COC SIZE PROFIT CAP INCD INEFF GDPP INF IR
NPL 1
COC −0.207* 1
SIZE −0.144* 0.618* 1
PROFIT −0.425* −0.264* −0.105* 1
CAP 0.065* −0.151* −0.260* 0.171* 1
INCD −0.072* −0.426* −0.327* 0.355* 0.188* 1
EFF 0.324* 0.135* −0.031 −0.575* −0.025 −0.117* 1
GDP −0.380* 0.408* 0.287* 0.053 −0.131* 0.100* −0.068* 1
INF −0.006 −0.184* 0.018 −0.03 0.150* −0.121* −0.043 −0.121* 1
IR −0.081* 0.053 −0.027 0.076* −0.156* 0.118* 0.051 0.071* −0.641* 1
*shows signi icance a he 0.05 le el.
Table 5
Reg ession esul o COC.
Va iable Coe icien S anda d e o - alue p- alue
COC −0.025 0.012 −2.02 0.046**
SIZE −0.004 0.003 −1.46 0.148
PROFIT −1.746 0.342 −5.10 0.000***
CAP −0.012 0.083 −0.15 0.884
INCD 0.069 0.052 1.35 0.182
INEFF 0.050 0.028 1.80 0.076*
GDP −0.254 0.093 −2.74 0.008***
INF −0.267 0.045 −5.88 0.000***
IR 0.087 0.050 1.73 0.087*
Cons an 0.119 0.050 2.39 0.019**
R-squa ed 0.319 Numbe o obs 960
F- es 12.580 P ob >F 0.0000
LM Tes (p- alue) 0.0000 Woold idge Tes (P ob >F) 0.0000
Hausman Tes (p- alue) 0.0000 Wald Tes (p- alue) 0.0000
***Signi ican a 1 % le el, **Signi ican a 5 % le el, *Signi ican a 10 % le el.
No es: The dependen a iable is he nonpe o ming loan (NPL). The -s a is ics and p- alues a e based on obus s anda d e o s.
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
7
missing alues unde some o he a iables ha e p o ided ha his s udy
is based on he unbalanced panel, which is ano he limi a ion o his
s udy. Also, some o he con en ional banks in Sou h Asian coun ies
s a ed hei ope a ions la e han in 2006.
Sugges ions o u u e esea ch
In he ligh o he p esen s udy, se e al u u e esea ch di ec ions a e
highligh ed. Fi s ly, a key opic o deba e a ising om he GFC has been
he way ha adi ional banks add ess non-pe o ming loans. Con en-
ional banks a e essen ial as in e media ion pa ies in ol ed in de aul
isk o nonpe o ming loans in hei business. Ne e heless, inding any
s udies beyond highly limi ed empi ical esea ch is impossible. The e-
o e, he sugges ion is o u he s udies o ecognise how con en ional
banks de e mine he issue o NPLs. Co up ion should no be he only
heme; di e en ele an aspec s should also be ex ensi ely in es i-
ga ed, such as o icial policies, owne ship, Islamic s andpoin s, and legal
and public elemen s. Second, u u e s udies should analyse non-
pe o ming loans in a disagg ega ing me hod, whe eby non-
pe o ming loans a e subdi ided in o consume and co po a e loans.
Thi dly, o NPLs o adi ional banks o be examined mo e comp e-
hensi ely, esea ch could be conduc ed ha compa es s a es, o egions,
such as ( he Sou h Asian Associa ion o Regional Coope a ion) o
ASEAN ( he Associa ion o Sou heas Asian Na ions), which ha e e y
simila ex e nal en i onmen s. In addi ion, a compa ison be ween Sou h
Asian banks and o he banks in de eloping and de eloped coun ies is
also essen ial. The ou h ecommenda ion is ha esea che s need o
conduc an analysis compa ing NPLs in bo h s anda d and Islamic
banking sys ems.
CRediT au ho ship con ibu ion s a emen
Abdul Rehman: W i ing –o iginal d a , Concep ualiza ion. Waqas
Mehmood: Supe ision, Me hodology, Concep ualiza ion. Ahna Ali
Alsmady: W i ing – e iew &edi ing, So wa e. A shian Sha i :
W i ing – e iew &edi ing, Valida ion, Concep ualiza ion.
Decla a ion o compe ing in e es
The au ho s decla e ha hey ha e no known compe ing inancial
in e es s o pe sonal ela ionships ha could ha e appea ed o in luence
he wo k epo ed in his pape .
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Table 6
Reg ession esul o CPI.
Va iable Coe icien S anda d e o - alue p- alue
CPI −0.001 0.000 −4.57 0.000***
SIZE −0.007 0.003 −2.25 0.027**
PROFIT −1.702 0.337 −5.05 0.000***
CAP −0.015 0.081 −0.18 0.855
INCD 0.070 0.048 1.45 0.151
INEFF 0.054 0.027 2.04 0.045**
GDP −0.217 0.096 −2.26 0.027**
INF −0.208 0.044 −4.71 0.000***
IR 0.096 0.050 1.94 0.056*
Cons an 0.201 0.053 3.77 0.000***
R-squa ed 0.339 Numbe o obs 974
F- es 12.846 P ob >F 0.0000
LM Tes (p- alue) 0.0000 Woold idge Tes (P ob >F) 0.0000
Hausman Tes (p- alue) 0.0000 Wald Tes (p- alue) 0.0000
***Signi ican a 1 % le el, **Signi ican a 5 % le el, *Signi ican a 10 % le el.
No es: The dependen a iable is he nonpe o ming loan (NPL). The -s a is ics and p- alues a e based on obus s anda d e o s.
A. Rehman e al. Resea ch in Globaliza ion 9 (2024) 100241
8
