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The relationship between corruption and credit risk in commercial banks of Pakistan

Rehman, Abdul and Abdul Adzis, Azira and Mohamed Arshad, Shamsul Bahrain (2020) The relationship between corruption and credit risk in commercial banks of Pakistan. International Journal of Innovation, Creativity and Change, 11 (1). pp. 701-715. ISSN 2201-1323

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This study investigates the relationship between corruption and nonperforming loans in Pakistan using a sample of 18 commercial banks for period 2000-2017 where panel regression models of OLS estimator, fixed effect and random effect are employed. The results show a significant negative relationship between control of corruption and credit risk as measured by non-performing loans indicating that tighter control of corruption would lower the non-performing loans. Furthermore, bank size shows a positive impact signifying that larger banks tend to take more excessive risks. In contrast, return on assets and capitalization negatively impacted on the non-performing loans demonstrating that those banks which generate higher earnings and have higher capital portion could reduce the level of non-performing loans. In addition, macroeconomic variables of GDP and inflation rate indicate significant relationship with non-performing loans since good economic situation can increase borrower creditworthiness which leads to lower default payments. Furthermore, both Hausman and Lagrangian Multiplier tests show that the random effect is preferred over fixed effect and OLS, respectively. The findings provide insights to policy makers in making strategic decisions regarding non-performing loans with regards to corruption as well as bank-based and macroeconomic indicators

Item Type: Article
Uncontrolled Keywords: Non-performing loan, Panel regressions, Corruption, Pakistan.
Subjects: H Social Sciences > HG Finance
Divisions: School of Economics, Finance & Banking
Depositing User: Mrs. Norazmilah Yaakub
Date Deposited: 18 Oct 2020 01:25
Last Modified: 18 Oct 2020 01:25

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