The Determinants of Non-Performing Loans in the Indonesian Banking Industry: An Asymmetric Approach Before and During the Pandemic Crisis

Abstract

The outbreak has created an unprecedented crisis that influences macroeconomic variables. These circumstances are predicted to be contagious for banking performance. To understand the related influences, this study attempts to examine the asymmetric relationship between macroeconomic variables and non-performing loans/financing of the Indonesian banking industry before and during the COVID-19 pandemic. The nonlinear autoregressive distributed lag (NARDL) is adopted based on the time-series data from 2005Q1 to 2021Q1. The study provides evidence that an asymmetric relationship between macroeconomic variables and the banks’ non-performing loans/financing exists both before and during the pandemic. In addition, asymmetric relationships of macroeconomic variables on Islamic banks are more prominent before the pandemic even though it occurs inversely during the pandemic. As for policy implication, the financial authority needs to be prudent in implementing financial policies due to the presence of an asymmetric relationship between macroeconomic variables and the banks’ non-performing loans/financing. Moreover, the authority must ensure that all financial policies will be effective to all types of banks regardless of conventional or Islamic banks.

Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging economies

“…Anita et al ( 2022 ) documented that government budget balance positively impacts banks’ NPLs in South Asian Association for Regional Cooperation (SAARC) economies while GDP, sovereign debt, inflation rate, and money supply have a negative impact on banks’ NPLs. Similarly, Fakhrunnas et al ( 2022 ) revealed an asymmetric nexus between macroeconomic factors and the banks’ NPLs in Indonesia both before and during the COVID-19 pandemic. Foglia ( 2022 ) underlined that GDP and public debt negatively impact NPLs in the Italian banking system whereas the unemployment rate and domestic credit have the opposite effect.…”

Is the COVID-19 Matters for Islamic Banking Performance? A Cross-Countries Analysis

“…Secondly, the study provides a new viewpoint by examining Islamic banking performance focusing on profitability and financial stability. We acknowledge that Etikonomi Volume 23 (1), 2024: 201 -218 the previous studies already explained how the COVID-19 pandemic affects banking performance, such as Fakhrunnas et al (2022) concerning the asymmetric effect of risk performance, Anto et al (2022) and Fakhrunnas et al (2021) examining the performance of the credit risk in Islamic bank'sbank's home financing, Elnahass et al (2021) measured the global banking performance using risk and return perspective, but they did not provide sufficient observation of Islamic bank while Li et al (2021) concern on how the outbreak affect income diversification of in banking industry. The studies mentioned above need to be extended to examine the impact of COVID-19 on Islamic banking performance more comprehensively.…”

“…Other relevant previous studies examine the asymmetric effect of the COVID-19 pandemic on Islamic banking stability in Indonesia, which Fakhrunnas et al (2022) studied. The findings explain that macroeconomic variables' impact on Islamic banks' nonperforming financing during the pandemic was asymmetrical.…”

“…In addition, other studies by Anto et al (2022) and Fakhrunnas et al (2021) highlight how the pandemic affected Islamic banks' home financing, emphasizing the impact of regional economics. However, what was studied by Fakhrunnas et al (2022), and Fakhrunnas et al (2021 uses a single-country analysis, which may result in different findings when it is applied to other countries.…”

Determinants of Non-Performing Loans of Public Commercial Banks

“…As Nepal's present legislative framework and institutional structure are unfavorable to the growth of the entire economic and private sectors, there is an urgent need for reformation in both areas. According to Fakhrunnas et al (2022), the pandemic has substantially influenced the real economy, notably in the tourism and transportation sectors. According to Erdas and Ezanoglu (2022), the banking industry is critical to the health of the economy and its prosperity.…”