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This paper empirically studies the macroeconomic factors determining the non-performing loans (NPLs) of the banking and financial institutions in Malaysia. Using a set of time series data from Q12006 to Q42015, Auto-Regressive Distributed Lag (ARDL) method was employed to discover the significant relationships between the variables in the long run as well as short run elasticity within the model. The study concludes that the level of NPLs in Malaysia is affected by Malaysian macroeconomic variables namely Gross Domestic Product (GDP), Base Lending Rate (BLR), Inflation (INF) and Household Income Distribution (ID). The result implies that GDP is significant and negatively affect NPLs, meanwhile BLR and ID are significant and positively related to NPLs, in line with the expected results. Nonetheless, INF resulted in insignificant relationship with NPLs contrary to our expectation. The result of this research is useful to assist financial institutions and the regulators for policy formulation so as to minimize the negative effects of NPLs to the Malaysian financial system.

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