Determinants of Non-Performing Loans in a Small Island Economy of Fiji: Accounting for COVID-19, Bank-Type, and Globalisation

Abstract

An increase in non-performing loans and bad debts in the banking sector can make banks vulnerable to a loss of confidence among customers and other banks and a banking collapse. The recent pandemic (COVID-19) and the evolving globalisation can affect bank operations, although the effects may depend on the type of banks and other bank-specific factors. In this paper, we revisit the topic on the determinants of non-performing loans of banks in a small island economy of Fiji over the period 2000 to 2022. We apply a fixed-effect method and consider seven banks (five commercial banks and two non-bank financial institutions). In our estimations, we examine the effect of bank-specific factors and control for the social and economic globalisation, the GFC, the COVID-19 pandemic, and bank-type effects, as well as the effect of the interaction between the bank type and the pandemic, as key contributions of the study. Overall, our results are consistent in terms of the effects noted from the bank-specific factors. From the extended model estimations, we note that COVID-19 had a more adverse effect on loan losses than the GFC, and the interaction between the bank type and COVID-19 indicates that non-banks were highly vulnerable to loan losses, whereas commercial banks exhibited greater preparedness. Economic globalisation reduces bank losses, whereas social globalisation exacerbates NPLs.

Determinants of Bank Profitability—Do Institutions, Globalization, and Global Uncertainty Matter for Banks in Island Economies? The Case of Fiji

“…Individuals receiving remittances often deposit these funds into their local bank accounts, expanding the bank's pool of funds and enabling the bank to extend loans and engage in investment activities. In one study on banks in Fiji, Chand et al (2021) found a positive correlation between remittances and bank stability, and in another (Chand et al 2023), they observed a negative association between remittances and non-performing loans, indicating that remittances support banking operations. Similarly, Ayhan and Toufaili (2021) examined the relationship between remittances and bank profitability for banks in Lebanon, and they found a positive relationship.…”

“…Following a few recent studies (Theiri and Hadoussa 2023;Chand et al 2021Chand et al , 2023, we specify the profitability model as follows:…”