A study on macroeconomic determinants and the inclusion of unexpected crises towards non-performing loans among Malaysian conventional banks

A resilient conventional banking sector is pivotal for fostering economic development, particularly in emerging economies such as Malaysia, where banks play a crucial role in driving credit creation, profitability, and overall growth. This study examines the correlation between key macroeconomic indicators and unexpected crises towards non-performing loans in Malaysian conventional banks from 2002 to 2023, employing panel data analysis with Stata software. Analyzing data on 17 conventional banks, this research investigates the impact of macroeconomic variables, including the unemployment rate, gross domestic product growth, inflation rate, lending interest rate, and exchange rate, on the NPLs. It also identifies the influence of unexpected crises, such as the Global Financial Crisis (GFC) and the Covid-19 pandemic. Thus, the analysis revealed that all factors have statistical significance and influence the movement of NPLs in Malaysian banks. The unemployment rate, GDP growth, lending interest rate, and Covid-19 pandemic variable all showed a significant positive connection with NPLs, suggesting that higher unemployment, changes in lending interest rates, economic expansion, and the pandemic lead to higher loan defaults. In contrast, the inflation rate, exchange rate, and global financial crisis variables had a significant negative relationship with NPLs. By analyzing these periods of expansion and the ongoing economic downturn due to the pandemic, the research sheds light on the impact of macroeconomic variables and unexpected crises on NPLs. Moreover, this study addresses a significant gap in existing literature by highlighting the overlooked influence of pandemic years on NPLs. Furthermore, this study results in two significant contributions by including the pandemic years as a key variable and the exchange rate fluctuations in the analysis toward the NPLs. The findings offer valuable insights for Malaysian conventional banks, policymakers, and individuals seeking similar studies, contributing to advancing knowledge in banking and macroeconomics. Therefore, this research emphasizes the importance of a resilient banking sector in sustaining economic stability and growth in emerging economies like Malaysia.