Ventus and Business Process Outsourcing

The determinants of non-performing loans: an econometric case study of Guyana[1]

Tarron Khemraj
Assistant Professor of Economics
New College of Florida

Sukrishnalall Pasha
Lecturer
University of Guyana

ABSTRACT

The study attempts to ascertain the determinants of non-performing loans in the Guyanese banking sector using a panel dataset and a fixed effect model similar to Jimenez and Saurina (2005). Consistent with international evidence we find that the real effective exchange rate has a significant positive impact on non-performing loans. This indicates that whenever there is an appreciation in the local currency the non-performing loan portfolios of commercial banks are likely to be higher. Our empirical results show that GDP growth is inversely related to non-performing loans, suggesting that an improvement in the real economy translates into lower non-performing loans. We also find that banks which charge relatively higher interest rates and lend excessively are likely to incur higher levels of non-performing loans. However, contrary to previous studies, our evidence does not support the view that large banks are more effective in screening loan customers when compared to their smaller counterparts.

Key Words: Non-performing loans, Panel regression model, Guyana.

I. INTRODUCTION

It is widely accepted that the quantity or percentage of non-performing loans (NPLs) is often associated with bank failures and financial crises in both developing and developed countries. In fact, there is abundant evidence that the financial/banking crises in East Asia and Sub-Saharan African countries were preceded by high non-performing loans. The current global financial crisis, which originated in the US, was also attributed to the rapid default of sub-prime loans/mortgages. In view of this reality it is therefore understandable why much emphasis is placed on non-performing loans when examining financial vulnerabilities.[2] The aim of

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