This paper focus on CIMB Bank in Malaysia. The first name before it changed like today was Bian Chiang Bank. It was established in Kuching by Wee Kheng Chiang in year 1924. Its primary activities were business financing and the issuance of bill of exchange. In 1979, Bian Chiang Bank was renamed Bank of Commerce Berhad. This was a result of its purchase by the UMNO-owned Fleet group. Bank Bumiputra Malaysia Berhad and Bank of Commerce merged to form Bumiputra-Commerce Bank. 1986 The Fleet Group buys MGI's entire stake in Bank of Commerce. The bank acquires a 51 per cent stake in Pertanian Baring Sanwa Bhd and renames it Commerce International Merchant Bank Berhad (CIMB). In 1991, Bank Of Commerce merges with UAB to create a new commercial bank, Bank of Commerce (M) Berhad (BOC). Simultaneously, Bank of Commerce Berhad becomes the holding company and is renamed Commerce Asset-Holding Berhad. On 1 October 1999, BOC merges with Bank Bumiputra Malaysia Berhad and changes its name to Bumiputra-Commerce Bank Berhad. BCB intergrates with CIMB. (www.cimb.com).
Background of Study
Each of the people in this world must have experience in borrowing money from the bank. The bank will charge certain percentages to the borrowers in term of getting profit. The different of the profit is being calculated by the interest that being charge to the borrowers. If the interest is in a big figure, it will give a burden to the borrowers to pay it and it also will give problem to the bank in collecting that money back.
Every bank must have the same problem. The problem is having difficult to collect back the money that the bank lend to the borrowers. When the borrowers still did not pay the loan until the maximum terms given by the bank it becomes a problem to the bank and it is known as non-performing loan (NPL).
Non-performing loan will be effect by the certain factors. This paper will study on the macroeconomics factors only. These factors are base lending rate (BLR), inflation rate, gross domestic product (GDP), and unemployment rate. This paper will study whether these factors is the main contribution to this problem or not.
Problem Statement
As the earlier in this paper, the problem or can be said that the major problem for every bank and of course CIMB Bank also is when all the banks want to collect the money back from the borrowers.
This paper is wants to investigate, is there any effect when the macroeconomics environment occur in the country towards non-performing loan for CIMB Bank in Malaysia. The factors under macroeconomics environment for this research are base lending rate (BLR), inflation rate, gross domestic products (GDP) and lastly are unemployment rate.
The bank with higher rate of non-performing loan is going to have a problem in the future.
This is because; the bank does not have enough money to lend the money to the
potential borrowers. And it will cause the bank borrows from others bank.
Research Question
Every research must have many questions to be answer. So from the answer, the researcher can find what they are looking for from the study. The questions below can explain clearly the problem statement before.
Does a macroeconomic environment give the impact NPL? This question will explain which factors give to the NPL for the bank.
How big macroeconomic environment can influence the rate of NPL? While this question can explain which factors that are strongly affect the rate of NPL.
Objective of The Study
The entire task must have at least one objective or aim. So this thesis aim for answering all the questions as said earlier.
To investigate the relationship between the independent variables (macroeconomic environments) towards dependent variable (NPL rate).
To determine factors are strongly give impact on the NPL rate.
Non-performing loan (NPL) can be determine or explain how efficient the bank in collecting the money back. So, when the NPL rate is higher, it show the bank have a big problem to collect back the money.
Thus, when the objective can be achieve, it will help CIMB Bank and also other banks to be more alert to the surrounding in Malaysia. So the bankers can take any action or find the way to avoid the problem become more seriously in the future.
Significant of The Study
This paper have very important role to certain people that are doing transaction with
the banks.
1.5.1 CIMB Bank
This study will help the bankers to alert when the bank having NPL problem. For example, when the Bank Negara Malaysia declares there will have inflation in near future, it could give an impact to the NPL performance. So it is a sign to the bankers to take any action before the bank having loss in the future.
1.5.2 Potential Borrowers
The potential borrowers also can gain information from this study. If the
inflation rate can give impact to the NPL rate, it shows that the most of the
borrowers cannot effort to pay the loan for several months.
Scope of The Study
This research is cover on banking area. This is study on NPL rate or performance for CIMB Bank. The study also tries to investigate the factors that influence the NPL rate and the area cover only on macroeconomics environment. There are BLR, inflation rate, GDP, and unemployment rate.
So, the scopes only focus on banking sector and the factors that can give impact towards NPL rate. The factors are only cover on macroeconomics environment that had been state before.
Limitation of The Study
There several problems that occurs during in completing this study.
1.7.1 Time Horizon
The duration of the data is very short, which is cover from year 2003 until
2009. And could give different result when the duration become more longer.
This is because the annual reports for CIMB Bank only publish for that year.
1.7.2 The Availability Data Collected
The data being collected is also limited because the study only covers one
(1) bank, CIMB Bank. The data is also limited because the data stream is
not up to date.
Definition of Terms
1.8.1 Non-Performing Loan (NPL)
NPL is loan that near default. NPL is any loan that consist of the principal
and Interest that more than 90 days overdue; or more than 90 days' worth of
interest has been refinanced, capitalized, or delayed by the agreement; or
payments are less than 90 days overdue but no longer anticipated. Or in the
simple word, the loan which the maturity date has passed but at least part of
the loan is still outstanding.
1.8.2 Macroeconomics Environment
Major external and uncontrollable factors that influence an organization's
decision making and effect its performance and strategies. For example;
GDP BLR, inflation rate, unemployment rate and so on.
1.8.3 Base Lending Rate (BLR)
BLR is a base interest rate calculated by financial institutions base on a formula which takes into account the institutions' cost of funds and other administrative costs.
1.8.4 Inflation Rate
The inflation rate is a measure of inflation, the rate of increase of a price
index. It is the percentage rate of change in price level over time. Inflation is a
rise in consumer prices, increasing the cost of living.
1.8.5 Gross Domestic Product (GDP)
The monetary value of all the finishes goods and services produced within a
country's borders in a specific time period, though GDP is usually calculated
on an annual basis period.
1.8.6 Unemployment Rate
The percentage of the total labour force that is unemployed but actively
seeking employment and willing to work. 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 labour force.
Summary
This study consists of the macroeconomics environment like GDP, BLR, inflation rate and unemployment rate. This research is to know the relationship between the macroeconomics environments with the performance of NPL for CIMB Bank. Besides that, it can help of significant to the bankers to know what are the major factors that make the rate of NPL being up and down.
CHAPTER 2
LITERATURE REVIEW
2.0 INTRODUCTION
Non-performing loan (NPL) is one of the elements to determine the growth of the
CIMB Bank. It is not only for this bank, but all the banks also. Moreover NPL can
give the sign to the bank, what should the bankers do to increase the revenue or
profit for the bank. If the bankers cannot find the way to solve the higher of NPL
rate, could be the bank will suffer a big loss in the future. It is not a big problem to
the country if only one bank having this problem, but what will happen if more
than half banks in Malaysia having this problem and at critical level? Sure it will
drag our economy going down and having problem with the investors outside.
This topic will quite interesting to the bankers. This is because the bankers can
know whether the macroeconomics environment can give impact to the NPL or not.
This also can help the academicians and students learns the factors contribute to the
up and down of the NPL rate. There are several factors for macroeconomics
environment that can drag the NPL rate such as inflation rate, base lending rate
(BLR), gross domestic product (GDP), unemployment rate, and so on. In future, this
can help the bank to minimize the NPL rate for the bank.
2.1 PREVIOUS STUDY
The topic of NPL is quite popular topic among the bankers or academician. These
entire people always keep seeking the factors that make the NPL rate fluctuate.
Many studies being done to investigate the relationship between NPL rate and the
factors like macroeconomic variables.
From the last study, the decelerating growth in the NPL is cause by the positive
economic condition by increasing in the saving in Hungary. In Poland, increasing
number of insolvent company contribute to the accelerated the NPL ratio.
(Festic,M., and Beko,J., 2008)
Other study done by Fofack and Hippolyte L. (2005), in Sub- Sharan Africa, the
stability of macroeconomic and economic growth can give on declining of NPL. On
the other hand, NPL will rise when the higher cost of capital and lower interest
margins.
In the article title The Asian financial crisis and non-performing loans: Evidence
from commercial banks in Taiwan, the author said that possibly the financial crisis
happened in year 1997 cause the rates of non-performing loans steadily increase.
(Li,Yang, 2003). This is support by Sinkey and Greenwalt (1991) on the study that the external economic environment becomes worse off such as economic
depression can give the risk in NPL to arises.
Another study by Ranjan and Dhal (2005), banks' non-performing loan can be
effected by the terms of credit variables in the presence of bank size induced risk
preferences and macroeconomic shocks for the commercial bank in India.
Pasha (n.d.) empirical results support the view that macro-factors, such as, the
real effective exchange rate and growth in real GDP impacts significantly on the
level of NPLs for the case of Guyana.
From the study, GDP is representing the economic condition for the developed
countries. And it is done by Abdelkader Boudriga, Neila Boulila Taktak and
Sana Jellouli (2009), bank credit outcomes for developed countries do not have
significant impact from the economic condition. Economic cycles seem only matter
in developing economies.
Bogdan Moinescu (2008), in the study find that the most significant
macroeconomic variable for explaining system-wide short term movements in the
performance of the Romanian credit institutions is the unemployment rate.
In the last study, the movement of the inflation in Czech Republic, Slovakai and
Slovenia has decelerated the NPL ratio. (Mejra Festić and Jože Glogovšek, n.d.)
The study done by Borio (2001), the GDP growth gives challenge to the loan
portfolio and also risk in credit expansion. And it also will expected that the
unemployment, interest rate and inflation become higher.
Another study done by Salas and Saurina (2002), the real GDP growth and credit
growth, bank size, capital ratio and market power are the factors that can affect the
variation in NPL. Others factors that can give impact the NPL ratio are the asset
growth, operating efficiency and exposeure to local loans. (Bercoff, Giovanni and
Grimard, 2002)
In Gulf Cooperative Council (GCC) countries, the study said that the GDP and NPL
have inverse relationship between it. Besides that, the global financial market
condition also can give impact on the rate of NPL. It can be conclude by the
Espizona,R., and Prasad, A., (2010) that the NPL can be effect by the
macroeconomic factors and also by the bank specific characteristic.
In the Indian banking system, the inflation rate is not a strong factor that can affect
the NPL performance in India. But the study find that the macroeconomic factors
such as GDP and effective exchange rate are the items that can make the NPL ratio
being fluctuates. (Dash, M. K., and Kabra, G., 2010)
The other study done by the Hu, Jin-Li, Yang Li and Yung-Ho, Chiu (2004), there
are some factors that can make the NPL being upward and downward. The factors
are government shareholding in a bank, bank size, revenue source diversification
and bank establishing before or after deregulation.
2.2 Summary
In the nutshell for this chapter, literature review will help this study to the end. It is
also will give the reader more information about the topic. Other than that, literature
reviews give the research more understanding about the factors that give effect on
the non-performing rate and it also will support the research.
CHAPTER 3
METHODOLOGY AND DATA
3.0 Introduction
In this chapter, the reader will know what method will be use to achieve the
objective of the study. Besides that, this study also explains in deep the dependent
variable and also the independent variables.
The objective is to investigate the factors that influence the rate of the non-
performing loan (NPL) for the CIMB Bank. So, this chapter will test the hypothesis
whether all the independent variables give impact on the NPL or not.
3.1 Data Collection
The data of the dependent variable is get from the secondary data. This is the non-
performing loan (NPL) for CIMB Bank. The data were collected for only eight (8)
years from 2002 to 2009. This is because the source is very limited and hard to get.
On the other hand, the independent variables which are macroeconomic variables
(gross domestic product, base lending rate, inflation rate and also unemployment
rate) were also use the secondary data. For this study, the independent variables
were collected from 2000 to 2009, which is ten (10) years.
3.2 Sampling Frame
The study is to find the factors that influence the rate of non-performing loan. So, it
is hard to do various types of bank in Malaysia, the study just only take one (1)
bank as the sample. The bank being choose was CIMB Bank. The data is collected
for eight (8) years.
3.3 Sources of Data
3.3.1 Annual Report
All the data is gather together. The data of NPL rate was collected from the
annual report of the CIMB Bank. To get the specific NPL rate for each
branches of CIMB Bank is very hard, so the data that being use represent for
all the CIMB Bank.
3.3.2 Data Stream
While the independent variables were get from the secondary data also, which
it comes from various sources. The sources are from the data stream. This is
easy way to find the data, especially the data of the macroeconomic factors.
3.3.3 Internet
This study also uses the internet to update the data that get earlier. Besides
that, the study use internet to find other information to support the result of the
study.
3.4 Variables and Measurement
This study used two types of variables which are; dependent variable and
independent variables.
3.4.1 Dependent Variable
The dependent variable for this study is non-performing loan (NPL) rate for
CIMB Bank. It is being measure by look at the percentage being calculated by
the bank.
3.4.2 Independent Variables
For the independent variables, there are four (4) that will be measure. There
are; gross domestic product (GDP), base lending rate (BLR), inflation rate and
lastly is unemployment rate.
3.5 Research Design
This study is design to find the relationship between independent variables and
dependent variable.
3.5.1 Purpose of the study
The purpose of the study is to find the factors that influence the rate of non-
performing loan for CIMB Bank. It also wants to find the relationship
between macroeconomic variable and performance of non-performing loan.
3.5.2 Types of investigation
The study is use correlation types of investigation. Correlation will explain
the relationship between two variables. Besides that, the investigation also
can give the significant factors that effect on the NPL rate.
3.5.3 Unit of analysis
In this study, to measure the independent variables which is macroeconomic
environment, it use the rate of inflation, base lending rate, unemployment rate
and also gross domestic products. While for measure dependent variables, it
looks at the rate of non-performing loan by year to year.
3.5.4 Time horizon
This research will use yearly basis data from year 2003 to 2009 for all the
variables; gross domestic product, base lending rate, inflation rate,
unemployment rate and lastly is non-performing loan rate.
3.6 Theoretical Framework
This is the classical theory that explained the correlation between macroeconomic
factors with the non-performing loan rate (NPL).
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)
Gross domestic product (GDP)
Base lending rate (BLR)
Non-performing loan Rate
Inflation rate
Unemployment rate
I.V D.V
Base on the figure 1, the rate of non-performing loan can be explain by the gross
domestic product, base lending rate, inflation rate and lastly is unemployment
rate.
3.7 Data Analysis and Treatment
The method being use in the study is Multiple Linear Regression Model. The
general purpose of this statistical tool is to learn about the relationship between
several independent variables and dependent variables. Where the equation will
help to determine on how independent variables will give effect to the dependent
variable.
Multiple Linear Regression Model:
Where;
Y = Dependent variable which represent stock market price
= The constant number of equation
= Coefficient Beta value
= Independent variable which represent GDP
= Independent variable which represent inflation rate
= Independent variable which represent BLR
= Independent variable which represent unemployment rate
= Error
Correlation Coefficient ( r )
The quantity r, called linear correlation coefficient, measures the strength and the
direction of a linear relationship between two variables. The value of r is can explain
the relationship of those variables, -1 < r < +1. The positive sign are used for positive
linear correlations and negative sign is for negative linear correlation.
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.
T-Test
The t-test gives an indication of the separateness of two sets of measurements, and is
thus used to check whether two sets of measures are essentially different. The typical
way of doing this is with the null hypothesis that means of the two sets of measures are
equal.
3.8 Hypothesis Statement
The hypothesis below can explain the factors that being influence the rate of non-
performing loan for CIMB Bank going fluctuate;
Hypothesis 1
H0: There is no relationship between macroeconomic environments with the rate of
non-performing loan.
H1: There is relationship between macroeconomic environments with the rate of
non-performing loan.
3.9 Summary
Conclusion from this chapter, this paper is to find the relationship between
macroeconomic factors which are gross domestic product, inflation rate, base
lending rate and unemployment rate with the rate of non-performing loan. To
determine the significant between these two variables, the study use Multiple Linear
Regression method. This study will help the banker or the borrowers to decrease the
rate of non-performing loan in the future.
