A simple definition of non-performing loan is a loan that is not earning income. In details it means full payment of principal and interest is no longer anticipated, principal or interest is 90 days or more delinquent, or the maturity date has passed and payment in full (Yixin Hou, 2005). This study focusing on the macroeconomic factors towards non-performing loans at Bank Rakyat Tampin. This study also will be conducted because want to look which one of the macroeconomics factors that give more impact on non-performing loan at Bank Rakyat Tampin.
By this study, it will collect all the data needed and will examine whether the non-performing loans rate keeps increasing or decreasing due to the economic condition. Non-performing loans can happen due to many factors. Financial institution should aware of this matter because it may affect the banking system. The non-performing loans rate can arise if there are no corrective actions are taken. Furthermore, the bank itself will suffer of losses when the non-performing loans become worst and also may lead to the bankruptcy to the bank. So this study may reveal the factors that contribute to the non-performing loans and will more focus on macroeconomic factors such as Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate and unemployment rate.
Background of Study
Bank Rakyat is one of the banks that provide a loan to people and was established in September 1954 under the Cooperative Ordinance 1948, which is the expansion of the cooperative movement in Peninsular Malaysia. They also are the largest co-operative bank in Malaysia and finally becoming a syariah co-operative bank by introducing Islamic banking product at all branches. They became full-fledge Islamic cooperative bank in 2002. As the largest co-operative bank in Malaysia, they provides complete Islamic Banking facilities for the co-operative movement and also being stable financial institution capable of providing full range of banking and financial services not only to its co-operative members, but also for the general public.
Bank Rakyat aims to improve the economic status of its co-operative members and to make profit for expand further. The major contributors for the Bank Rakyat is the Aslah personal financing products and their loans growth improving from year-to-year, making it among the important portfolio for them. (Bernama,2010). Bank Rakyat Tampin is one of the branches from 127 branches in Malaysia. Though Aslah personal financing is their major contribution but there are also loans become non-performing loan due to customer who does not do the payment nicely according to the repayment method. So, the study were conducted to see the significant of each the macroeconomic factors such as Gross Domestic Product, Base Lending Rate, inflation rate and unemployment rate towards non-performing loans at Bank Rakyat Tampin.
Problem Statement
Nowadays, the business of financial institution becomes more complex and difficult. Many financial institutions have to work harder to maximize their performance and profit of business. They set a marketing strategy and implement it to achieve their goals. Though, there are also happen cases of non-performing loan due to the economic crisis. Non-performing loan are a reflection of problems in the banking sector. The root of the 1997 Asian crisis was the high level of NPLs in the banking and corporate sectors and the costs of the crisis were enormous, not only in term of fiscal costs (costs to taxpayers) but also losses to the entire economy (Du, 2006).
Malaysia economic turn into recession in 2008 due to the world economic crisis and it hit our economic condition especially banking sector. In the worst scenario, a high level of NPLs in a banking system poses a systematic risk, thus it shows the performance of financial institution are not very well. The further liberalization of the country's financial sector, while causing some pressure on local bank in the near future, will enhance Malaysia's competitiveness in the long run (Malaysian Business, 2009). In this study, researcher tends to find out the relationship between performance of non-performing loans at Bank Rakyat Tampin and macroeconomic factors such as Gross Domestic Product (GDP), base lending rate (BLR), inflation rate and unemployment rate.
Research Question
Does a macroeconomic factor can affect the non-performing loans at Bank Rakyat Tampin?
Which of the macroeconomic factors those give stronger relationship towards the non-performing loans?
Research Objective
The aim of this research is to look at the significant of GDP, base lending rate, inflation rate and unemployment rate towards non performing loan at Bank Rakyat Tampin. In order to achieve this aim, several objectives were formulated as follow:-
To identify the macroeconomic factors that affects the non-performing loans at Bank Rakyat Tampin.
To examine the macroeconomic factors that shows stronger relationship towards NPLs at Bank Rakyat.
Significant of study
To the Bank Rakyat
This study will help the bank to identify the factors that influence loan become non-performing. It is also help the bank to perform an effective strategy in order to avoid from loan become non-performing. This research will be send to the bank as a reference.
To the Industry
The study will help to propose important strategy for the banking institution to take an action when it become to the non-performing loan. By knowing how macroeconomic factors can affect non-performing loan, it will be helpful to banking institution to predict when economic crisis happen.
Scope of study
The scope of study will cover the performance of non-performing loans at Bank Rakyat Tampin and also the macroeconomic factors. The main reason why this study focuses at Bank Rakyat Tampin is because the data of non-performing loan rate in monthly is hard to get due to the private and confidential data. The time horizon of this case study is in monthly time series where the macroeconomic factors will be in term of as Gross Domestic Product (GDP), base lending rate (BLR), inflation rate and unemployment rate. All the data will be analyse and evaluate by using multiple liner regression method, inclusive from year 2005 to 2009.
Limitation of study
For macroeconomic study, it is expected that the best result can be measure if the data collected more than 20 years, but the current case study only perform for 5 years. Horizon of the study is limited, which is the NPLs rate is just from Bank Rakyat Tampin branch because it hard to get the data due to the private and confidential. Most of the previous study using a different methodology and some information gather was not up to date. Moreover some article available is not the latest published.
Definition of term
Non-performing Loan
A non-performing loan can be defined as a loan which is be in default or close to being in default. Usually loans become non-performing after default for 3 months.
Macroeconomic factors
Macroeconomic factors are branches of economic that explain the behavior of an economy as a whole. This study used four economic factors included Gross Domestic Product, Base lending rate, inflation rate and unemployment rate. The selection of variables base of the past studies which is believes relevance to Malaysia.
Gross Domestic Product (GDP)
GDP is the amount of goods and services produced in a year, in a country. It is a market value of all final goods and services made within the boarder of a country in a year. It is often positively correlated with the standard of living, alternatively measure to GDP for that purpose.
Base lending rate (BLR)
A term applied in many countries to a reference interest rate use by banks. The term originally indicated the rate of interest at which banks lent to favored customer, for example those with high credibility, though this is no longer always the case.
Inflation rate
Inflation is one of the influential macroeconomic variables; it can be refer to a general rise in prices measured against a standard level of purchasing power, it's usually measure by the Consumer Price Index and it can be calculated on the basis of price indices.
Unemployment rate
Unemployment occurs when people are without jobs and they have actively looked for work within four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.
Summary
In this chapter, it employs some important macroeconomic factors such as gross domestic product, base lending rate, inflation rate and unemployment rate. Analysis is applied in order to understand the relationship between the macroeconomic factors and non-performing loan at the Bank Rakyat Tampin. This study also wants to find the significant of the macroeconomic factors and non-performing loan relationship whether positive or negative. This paper also represents an important solution towards addressing the issue to identification between all the variables.
CHAPTER 2
LITERATURE REVIEW
Introduction
In this chapter, the researcher has to search some literature that relevant with the case study. According to Sekaran (2003), literature review is a documentation of comprehensive review of the published work from secondary sources of data in the areas of specific interest to the researcher.
Finance and banking sector in Malaysia is regulated by Bank Negara Malaysia. All the process within the financial institution is view by them and they know everything regarding the operation of the bank. They also know the history of customer of the bank. For a loan purpose, a banker has to know their customer regarding their personal details and the commitment by the customer. It is important to identify the truth about the customer in order to avoid non-performing loans. Non-performing loan is an important element in the operation of the bank in order to recognize the profit growth of the bank itself.
Within the bank, the banker may reveal the reason why customer defaults in payment, but there are also important for banker to know or to analyse the sensitivity of macroeconomic towards NPLs. For Bank Rakyat, they are cooperative institution that provides a financing product for a customer. Most of the people make a loan to fulfill their needs and wants. Furthermore, most of the loans were easy to apply since most of the bankers, cooperative and financial institution offers a loan scheme to customer. But when the loan becomes non-performing, it is not a good sign for the banking sector and may lead to the worst condition if there is no action taken.
For this case study, it has to be onward in finding the literature for dependent variable and independent variables. In a view of dependent variable, the researcher has found the originate some of the literature about classification of non-performing loans. Meanwhile, for independent variables, the researcher has look into the macroeconomic factors that might influence the NPLs such as GPD, BLR, inflation rate and unemployment rate.
Previous Study
The issue of NPLs has gain higher attention around the world in banking sector since last few decades. A significant study has been done to investigate the relationship between NPLs and the macroeconomic factors. From the researcher's point of view, the eradication of non-performing loans is really needed in order to improve the economic status. Both of variables are related each other to keep maintain the performance of banking sector.
As mention before this, Bank Rakyat is full-fledge under syariah concept. Even though Islamic banks have special characteristics in which it operates on the basis of profit and loss sharing and extend different modes of financing than conventional banks, they still share the same guidelines for the classification and management of its non-performing loans. Both conventional and Islamic banks use the same guidelines known as Garis Panduan 3 (GP3) for the definition and treatment of non-performing loans or non-performing financing (Mokhtar & Zakaria, 2009).
The question of loan default is related with non recovery or repayment of loans. When a borrower cannot repay interest and/or installment on a loan after it has become due, then it is qualified as default loan or non-performing loan. It is known as non-performing because the loan ceases to 'perform' or generate income for the bank (Chowdhury & Adhikary, 2002)
Altman, Resti and Sironi (2001) analysed corporate bond recovery rate adducing to bond default rate, macroeconomic variables such as GDP and growth rate, amount of bonds outstanding, amount of default, return on default bonds, and stock return. It was suggested that default rate, amount of bonds, default bonds, and economic recession had negative effect, while the GDP growth rate, and stock return had positive effect on corporate recovery rate.
According to Salas and Saurina (2002), said that the variation in NPLs can be explain by real growth rate in GDP, rapid credit expansion, bank size, capital ratio, and market power. While Jimenez and Saurina (2005), determine in Spanish banking sector that GDP growth, high real interest rates and lenient credit terms can determined the NPLs.
From the study of Rajan and Dhal (2003) by regression analysis, reported that the method was utilizing the macroeconomic condition which measured by GDP growth and financial factors such as maturity cost and terms of credit, bank size, and credit orientation impact significantly on the NPLs of commercial banks in India.
Theoretical Framework
GDP and NPL
Nowadays, the evaluation on the effect of GDP growth on NPLs has been made by many global economist, rating agencies, and organizations such as the World Bank and the Asian Development Bank.
The growths in real GDP and NPLs have significant evidence of negative relationship. When more income improves the debt servicing capacity of borrower which in turn contributes to lower non-performing loans, there are strong positive growths in real GDP. Conversely, the level of NPLs will increase when there is a slowdown in the economy (low or negative GDP growth) (Suarina et al. 2005).
According to Bario et al.(2001), if expansion is associated with rapid credit growth, large increases in asset prices, a high level of investment, export growth and excessive capital accumulation, the level of credit risk is higher because risk is built up in a boom but materializes in the downturn. The impact of GDP growth and the business cycle on credit risk is usually represented as pro-cycle.
Interest rate and NPLs
According to Rajan (2005), the costs of funds and nurtures the culture of high-risk behavior has been increase by liberalization. So, higher interest rates are charged to high-risk borrowers in order to mitigate risks and also increasing banks' overall exposure. Banks has to increase the interest rate paid to depositors due to the arising in short term interest rates which is pain on liabilities. Instead of that, bank cannot increase their lending rates quickly enough because the asset side of bank balance sheet usually consists of loans of longer maturity at fixed interest rates and they must bear losses because of maturity transformation.
Inflation rate and NPLs
According to English (1996), bank can evaluate one of their main sources of revenue disappear and stabilization from chronic inflation may lead to a reduction in the size of banking system when inflation is drastically reduced and at the same time adversely affects the economy.
There are positive relationship between inflation rate and non-performing loans. The evidence shows the high level of impaired loans in a number of Sub-Saharan African countries with flexible exchange rate regimes are contribute by inflationary pressure. Furthermore, the rapid erosion of commercial banks' equity and consequently higher credit risk in the banking sector of these African countries is under responsible of inflation (Fofack, 2005)
Unemployment rate and NPLs
From the study, when there is decreasing demand for loans, it happens due to the expected unemployment growth rationally. Moreover, the rising of unemployment improves loan portfolio quality (Bario et al. 2001).
Summary
This case study was useful for the researcher for the better understanding in the context of banking system in Malaysia. Through this study also, the researcher will come out with the evidence and the previous study will help to establish a clear tie on the topic. The study base on previous research focusing on macroeconomic factors such as GDP, interest rate, inflation rate and unemployment rate that influence the non-performing loans. The findings will enhance the researcher and the bank understanding.
CHAPTER 3
METHODOLOGY AND DATA
Introduction
This chapter will explain the methods that were used in this study. The data also will be collected and analyse in order to have crystal clear about the variables used in this study. It will focus in the particular chapter on the research methodology including data collection, sampling frame, theoretical framework, and so on. Using the data collected, the result will treated and interpreted by statistical technique. The objective of this chapter is to gather information on the non-performing loan of Bank Rakyat performance towards macroeconomic factors. Thus, a hypothesis will be made to prove the relationship between both variables.
Data Collection
The NPLs rate data will be collected within year 2005 to the 2009. For the independent variables, this study only uses four factors, which are Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate, and unemployment rate. The data were collected from the Bank Negara Malaysia website. The range is between years 2005 to 2009 also.
Sampling Frame
This study used Bank Rakyat Tampin previous year report of non-performing loan in term rate. The information gathered is limited due to the private and confidential data. Thus, the study only gathered the NPLs rate from year 2005 to 2009 in monthly basis.
Sources of Data
This study will use secondary sources and data which refer to the information gathered from sources already existing. Secondary data are usually historical, already, assembled, and do not require access to respondent or subject. Most of the data are collected from the books, internet browsing, library research, and other people research. Data concerning on the rate of non-performing loan for Bank Rakyat Tampin and macroeconomics factors were gathered to see whether there are any significant between the dependent variable and the independent variables.
Variables and Measurement
Dependent Variable
The dependent variable for this study is the non-performing loan for Bank Rakyat Tampin in term of rate from 2005 t0 2009.
Independent Variables
For this study, there are four macroeconomics factors will be measured. There are Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate and unemployment rate.
Research Design
This research is designed to explore the relationship between dependent and independent variables. In this study, it engages in hypotheses testing that will explain the certain significant correlations between stock market performance and macroeconomic variables.
Purpose of the Study
The purpose of this study is to determine the relationship between non-performing loans for Bank Rakyat Tampin and the macroeconomic factors such as Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate and unemployment rate.
Types of Investigation
This study involved the correlation types of investigation in order to understanding the relationship between dependent and independent variables. In purpose to identify the significant influences between variables, the statistic test which is t-test will be considered.
Unit of Analysis
In this study involve Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate, and unemployment rate to measure macroeconomic variables, and non-performing loans rate of Bank Rakyat Tampin as indicates the overall NPLs performance of Bank Kerjasama Rakyat.
Time Horizon
This study will use monthly basis data from year 2005 to 2009 for the all variables used in this study including NPLs rate for Bank Rakyat, Gross Domestic Product (GDP), Base Lending Rate (BLR), inflation rate, and unemployment rate.
Theoretical Framework
Theoretical framework is a conceptual model on how one theory makes sense of the relationship among the several factors that have been identified as an important to the flow. There is a classical theory that explained the high correlation between the macroeconomic factors and the NPLs.
Dependent variable : Non-performing Loan Rate
Independent variables : Gross Domestic Product (GDP), Base Lending Rate
(BLR), inflation rate and unemployment rate.
Figure 1: Schematic Diagram (Relationship Diagram)
Independent Dependent
Gross Domestic Product
Base Lending Rate
Non-performing Loans
Inflation Rate
Unemployment Rate
According to the schematic diagram above, it can be elaborated that the non-performing loans are determine by the Gross Domestic Product, Base Lending Rate, inflation rate and unemployment rate.
Data Analysis and Treatment
The statistical tools use in the study is Multiple Linear Regression Model. Multiple linear regression models are an extension of bivariate correlation. It is more complex version as compared to simple linear regression in which there is more than one independent variables and possibly interaction term as well. Regression analysis is used when independent variables are correlated with one another and with dependent variables. This analysis is appropriate because all four independent variables correlated each other to affect the dependent variable, and there are possible interactions as well.
Multiple Linear Regression Model:
(Equation 1) Where;
Y = Dependent variable which represent non-performing loans rate
= The constant number of equation
= Coefficient Beta value
= Independent variable which represent Gross Domestic Product
= Independent variable which represent Base Lending Rate
= Independent variable which represent Inflation Rate
= Independent variable which represent Unemployment Rate
= Error
COEFFICIENT OF CORRELATION (r)
The correlation coefficient is used to measure of how well trends in the predicted values follow trends in past actual values. It measures the strength of association between 2 variables. In this study, the coefficient of correlation can be useful to test relationship between non-performing loans and four independent variables, Gross Domestic Product, base lending rate, inflation rate, and unemployment rate.
COEFFICIENT OF DETERMINATION (r 2)
The coefficient of determination is useful because it gives the proportion of the variance of one variable that is predictable from the other variable. It is a measure that allows us to determine how certain one can be in making predictions from a certain model or graph.
STATISTIC TEST (T-TEST)
A t-test is any statistical hypothesis in which the test statistic follows a values t distribution if the null hypothesis is true. It is most commonly applied when the test statistic would follow a normal distribution if the value of scaling term in the test statistic were known. When the scaling term is unknown and is replaced by an estimate based on the data, the test statistic (under certain conditions) follows a values t distribution.
Hypothesis Statement
Relationships are conjectured on the basis of the network of association established in the theoretical framework formulated for this research study.
Hypothesis 1
H0: There is no relationship between macroeconomic factors and non-performing loans.
H1: There is a relationship between macroeconomic factors and non-performing loans.
Summary
In this chapter, reviews all parts of theoretical framework and research design will be using in this case study. The aim for this study is to determine the relationship between non-performing loans and the macroeconomic factors that influence on it by using the multiple linear regression method. The result will indicate the significant of both variables. This information will perhaps can be used by the Bank Rakyat and others financial institution for better understanding about the effect of macroeconomic factors toward the cases of loans become non-performing.
