Macroeconomic and Bank Specific Determinants of Non-Performing Loans in Tajikistan Banking Sector

Abstract

The problem of non-performing loans (NPLs) is one of the factors that negatively affect the soundness of the banking sector. This paper investigates to detect the determinants of non-performing loans (NPLs) of Tajikistan for a sample of eleven banks and five microcredit deposit organizations for the period of 2010-2017. In terms of credit portfolio and total assets, these five microcredit deposit organizations are more active and existing for a long time than other credit institutions. From 2010 to 2017, the ratio of NPLs in Tajikistan has experienced high growth. Additionally, an increase of non-performing loans deteriorated on-time customer service of the banking system, detrimentally affected financial stability of the whole banking sector in Tajikistan. Due to these issues, this paper investigates the impact of macroeconomic and bank-specific factors on the ratio of NPLs. The analysis is based on a sample of 16 financial institutes for over period of 8 years, and Generalized Method of Moments estimator for dynamic panel models is used. NPL to total loans is the dependent variable, and macroeconomic variables are money supply (LnM2) and remittances (LnRemit). Moreover, bank-specific variables like lagged NonPerforming Loans, Return on Assets, Loan to Total Assets, Capital Adequacy Ratio, and Total Assets will be used as independent variables. The outcome of estimation found that all macroeconomic variables significantly have an effect to loan losses and except total assets, the rest of the bank-specific variables significantly impact to the NPL ratio.