Loan Growth, Bank Solvency and Firm Value: A Comparative Study of Nigerian and Malaysian Commercial Banks
DOI:
https://doi.org/10.6000/1929-7092.2019.08.32Keywords:
Loan growth, non-performing loans, firm value, bank solvency, panel data analysis.Abstract
The study explore the issues relating to credit growth, non-performing credit and bank solvency in the banking industry, recognizing that existing studies are largely sketchy in emerging and developing markets. Panel data estimation technique is employed in the study based on data extracted from 26 commercial banks in Nigeria and Malaysia over the period 2009 to 2017 making up to 234 observations. The results reveal that the NPLs for all banks is only explained by loan growth and inflation, NPLs for Nigerian banks is only explained by loan growth, leverage, efficiency, size and inflations while NPLs for Malaysian banks is only explained by leverage, efficiency, size, GDP and inflation. The bank solvency for all banks is only explained by NPLs, loan growth and leverage. The solvency for Nigerian banks is explained by NPLs, leverage and GDP while loan growth, size and inflation explained bank solvency for Malaysian banks. Firm value for all banks is explained by solvency, NPLs, leverage, efficiency, size and GDP, the value of firm for Nigerian banks is only explained by solvency, loan growth, leverage, efficiency and size. The firm value for Malaysian banks is only explained by solvency, loan growth, leverage, efficiency, size, GDP and inflation. It is observed that bank solvency play an important role in the firm value of commercial banks in the period of study. Hence, this paper contributes to the understanding of the dynamic role of abnormal loan growth and how it can enhance the volume of non-performing credit and suggest that further study can explore the interaction between abnormal loan growth and non-performing loans.
References
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Baradwaj, B. G., Flaherty M. V. & Shao, Y. (2014). The impact of lending growth on the riskiness of Chinese banks. Chinese Economy 47(5-6):29-49.
Bhullar, P. S & Bhatnagar, D. (2013). Theoretical framework EV vs. Stock price - A better measurement of firm value. International Journal of Commerce, Business and Management, 2(6), pp. 335-343.
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https://doi.org/10.1093/rof/rfr030
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https://doi.org/10.1016/j.jbankfin.2004.06.017
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https://doi.org/10.1504/IJMABS.2016.080223
Cucinelli, D. (2015). The impact of non-performing loans on bank lending behavior: evidence from the Italian banking sector. Eurasian Journal of Business, Economics and Management, 8(16):59-71.
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https://doi.org/10.1016/j.jbankfin.2010.06.007
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https://doi.org/10.1111/j.1468-2443.2010.01112.x
García-Herrero, A., & Vázquez, F. (2013). International diversification gains and home bias in banking. Journal of Banking & Finance, 37(7), 2560-2571.
https://doi.org/10.1016/j.jbankfin.2013.02.024
García-Herrero, A., Gavilá, S., & Santabárbara, D. (2009). What explains the low profitability of Chinese banks? Journal of Banking & Finance, 33(11), 2080-2092.
https://doi.org/10.1016/j.jbankfin.2009.05.005
Goddard, J., Molyneux, P., & Wilson, J. O. (2004). The profitability of european banks: a cross?sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
https://doi.org/10.1111/j.1467-9957.2004.00397.x
Gourio, F. & Miao, J. (2010). Firm heterogeneity and the long-run effects of dividend tax reform, American Economic Journal: Macroeconomics 2, pp. 131 - 168.
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Hess, K., Grimes, A. & Holmes, M. (2009). Credit losses in Australasian banking. Economic Record, 85(270):331-43.
https://doi.org/10.1111/j.1475-4932.2009.00551.x
Hutchison, M. (2002). European Banking Distress and EMU: Institutional and macroeconomic risks. Journal of Economics, 104(3):365-89.
https://doi.org/10.1111/1467-9442.00292
Jia, W. & Chen, B. (2008). Financial risk, business risk and firm value for logistics industry. WiCOM’08 4th International Conference on Wireless Communications, Networking and Mobile Computing, pp. 1-4.
https://doi.org/10.1109/WiCom.2008.2403
Kashif, M., Iftikhar, S. F. & Iftikhar, K. (2016). Loan growth and bank solvency: evidence from the Pakistani banking sector. Financial Innovation, 2:22, pp. 1-13.
https://doi.org/10.1186/s40854-016-0043-8
Kashyap, A.K., Rajan, R. & Stein, J.C. (2002). Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. The Journal of Finance, Vol. 57 No. 1, pp. 33-73.
https://doi.org/10.1111/1540-6261.00415
Khemraj, T. & Pasha, S. (2009). The determinants of non-performing loans: an econometric case study of Guyana. In: Presented at the Caribbean Centre for Banking and Finance Bi-annual Conference on Banking and Finance. St. Augustine, Trinidad. https://mpra.ub.uni-muenchen.de/53128/1/MPRA_paper_53128.pdf.
Kommunuri, J., Narayan, A., Wheaton, M., & Jandug, L. (2015). Enterprise Risk Management and Firm Performance Empirical evidence from Vietnam.
Kraft, E. & Jankov, L. (2005.) Does speed kill? Lending booms and their consequences in Croatia. Journal of Banking & Finance, 29:105-21.
https://doi.org/10.1016/j.jbankfin.2004.06.025
Leaven, L. & Majnoni, G. (2003). Loan loss provisioning and economic slowdowns: Too much, too late. Journal of financial intermediation, 12:178-97.
https://doi.org/10.1016/S1042-9573(03)00016-0
Levine, R. (2002). Bank-based or market-based financial systems: which is better? Journal of financial intermediation, 11(4), 398-428.
https://doi.org/10.1006/jfin.2002.0341
Levine, R., Loayza, N. & Beck, T. (2000). Financial intermediation and growth: causality and consequences. Journal of monetary Economics, 46(2000):31-77.
https://doi.org/10.1016/S0304-3932(00)00017-9
Lifland, S. (2011). The impact of working capital efficiencies on the enterprise value option: Empirical analysis from the energy sector. Advances in business research, 2(1), pp. 57-70.
Marijana-?urak, M., Pepur, S. & Poposki, K. (2013). Determinants of non-performing loans - evidence from South-eastern European banking systems. Banks & Bank System, 8(1):45-54.
Messai, A. S. & Jouini, F. (2013). Micro and macro determinants of non-performing loans. Int International journal of economics and financial issues, 3(4):852-60.
Nkusu, M. M. (2011). Nonperforming loans and macro financial vulnerabilities in advanced economies (No. 11-161). International Monetary Fund.
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21 (2), 222-237.
https://doi.org/10.1016/j.ribaf.2006.03.007
Pelozo, J. A. I. (2008). Loans, risks, and growth: the role of government and public banking in Paraguay. The Quarterly Review of Economics and Finance, 48(2):307-19.
https://doi.org/10.1016/j.qref.2006.12.009
Rajaraman, I. & Vasishtha, G. (2002). Non-performing loans of PSU Banks: some panel result. Economic and political weekly, pp. 429-435.
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research 22, 203- 224.
https://doi.org/10.1023/A:1019781109676
Shehzad, C. T., de Haan, J., & Scholtens, B. (2010). The impact of bank ownership concentration on impaired loans and capital adequacy. Journal of Banking & Finance, 34(2), 399-408.
https://doi.org/10.1016/j.jbankfin.2009.08.007
Tahir, I. M. & Razali, A. R. (2011). The Relationship between Enterprise Risk Management (Erm) and Firm Value: Evidence from Malaysian Public Listed Companies. International Journal of Economics and Management Sciences. Vol. 1, No. 2, 2011, pp. 32-41.
Tahir, S. H, Shehzadi, I, Ali, I. & Rizwanullah, M. (2015). Impact of bank lending on economics growth in Pakistan: an empirical study of lending to private sector. American Journal of Industrial and Business Management, 5:565-76.
https://doi.org/10.4236/ajibm.2015.58056
Tieman, A. F., & Hardy, D. C. (2008). Innovation in Banking and Excessive Loan Growth (No. 8-188). International Monetary Fund.
Tingbani, I. (2015). Working capital management and profitability of UK firms: a contingency theory approach (Doctoral dissertation, Bournemouth University).
Tinoco-Zermeño, M. A., Venegas-Martínez, F., & Torres-Preciado, V. H. (2014). Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach. Latin American Economic Review, 23(1):8.
https://doi.org/10.1007/s40503-014-0008-0
Torres, J. S. A., & Pabón, A. M. (2013). Loans Growth and Banks´ Risk: New Evidence (No. 010710). Banco De La República.
Wachtel, P. (2001). Growth and finance: what do we know and how do we know it? International Finance, 4(3):353-362.
https://doi.org/10.1111/1468-2362.00077
Zariyawati, M. A., Annuar, M. N., Taifiq, H., & Rahim, S. A. (2009). Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(11), 47-55
https://doi.org/10.1111/j.1468-2443.2011.01147.x
Alkhatib, A. (2012). Financial Performance of Palestinian Commercial Banks. International Journal of Business and Social Science, Vol. 3 No. 3, pp. 175-184.
Allen, F. & Gale, D. (2003). Competitions and financial stability. Journal of money, credit and banking, 453-480.
Alper, D., & Anbar, A. (2011). Bank specific and macroeconomic determinants of commercial banks profitability: Empirical evidence from Turkey. Business and Economic Research Journal, 2 (2), 140-152.
Altunbas, Y., Gambacorta L. & Marques-Ibanez, D. (2010). Bank risk and monetary policy. Journal of Financial Stability 6:121-129.
https://doi.org/10.1016/j.jfs.2009.07.001
Arellano, M., Bover O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Economics 68:29-51.
https://doi.org/10.1016/0304-4076(94)01642-D
Athanasoglou, P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinant of bank profitability. Journal of International Financial Markets, Institutions and Money, 121-136.
https://doi.org/10.1016/j.intfin.2006.07.001
Ayako, A., & Wamalwa, F. (2015). Determinants of Firm Value in Kenya: Case of Commercial Banks Listed at the Nairobi Securities Exchange. Applied Finance and Accounting, 1(2), 129-142.
https://doi.org/10.11114/afa.v1i2.934
Baradwaj, B. G., Flaherty M. V. & Shao, Y. (2014). The impact of lending growth on the riskiness of Chinese banks. Chinese Economy 47(5-6):29-49.
Bhullar, P. S & Bhatnagar, D. (2013). Theoretical framework EV vs. Stock price - A better measurement of firm value. International Journal of Commerce, Business and Management, 2(6), pp. 335-343.
Campello, M., Giambona, E., Graham, J. R. & Harvey, C. R. (2012). Access to liquidity and corporate investment in Europe during the financial crisis. Review of Finance, 16(2), 323-346.
https://doi.org/10.1093/rof/rfr030
Cottarelli. C., Dell’Ariccia, G. & Vladkova-Hollar, I. (2005). Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans. Journal of banking & Finance, 29:83-104.
https://doi.org/10.1016/j.jbankfin.2004.06.017
Crovini, C., Ossola, G. & Giovando, G. (2016). Loan growth and interest income of Italian listed banks: a multivariate analysis. International Journal of Markets and Business Systems, Vol. 2, No. 2, pp. 85-101.
https://doi.org/10.1504/IJMABS.2016.080223
Cucinelli, D. (2015). The impact of non-performing loans on bank lending behavior: evidence from the Italian banking sector. Eurasian Journal of Business, Economics and Management, 8(16):59-71.
https://doi.org/10.17015/ejbe.2015.016.04
Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of commercial banks Interest Margin and Profitability: Some International Evidence. World Bank Economic Review, 13, 379-408.
https://doi.org/10.1093/wber/13.2.379
Domac, I. & Martinez-Peria, M. S. (2003). Banking crisis and exchange rate regimes: is there a link. Journal of International Economics, 61(1):41-72.
https://doi.org/10.1016/S0022-1996(02)00081-8
Foos, D., Norden, L. & Weber, M. (2010). Loan growth and riskiness of banks. Journal of Banking & Finance, 34:2929-2940.
https://doi.org/10.1016/j.jbankfin.2010.06.007
Francis, W. B., & Osborne, M. (2010). On the behaviour and determinants of risk based capital ratios: Revisiting the evidence from UK banking institutions. International Review of Finance, 10(4), 485-518.
https://doi.org/10.1111/j.1468-2443.2010.01112.x
García-Herrero, A., & Vázquez, F. (2013). International diversification gains and home bias in banking. Journal of Banking & Finance, 37(7), 2560-2571.
https://doi.org/10.1016/j.jbankfin.2013.02.024
García-Herrero, A., Gavilá, S., & Santabárbara, D. (2009). What explains the low profitability of Chinese banks? Journal of Banking & Finance, 33(11), 2080-2092.
https://doi.org/10.1016/j.jbankfin.2009.05.005
Goddard, J., Molyneux, P., & Wilson, J. O. (2004). The profitability of european banks: a cross?sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
https://doi.org/10.1111/j.1467-9957.2004.00397.x
Gourio, F. & Miao, J. (2010). Firm heterogeneity and the long-run effects of dividend tax reform, American Economic Journal: Macroeconomics 2, pp. 131 - 168.
https://doi.org/10.1257/mac.2.1.131
Hess, K., Grimes, A. & Holmes, M. (2009). Credit losses in Australasian banking. Economic Record, 85(270):331-43.
https://doi.org/10.1111/j.1475-4932.2009.00551.x
Hutchison, M. (2002). European Banking Distress and EMU: Institutional and macroeconomic risks. Journal of Economics, 104(3):365-89.
https://doi.org/10.1111/1467-9442.00292
Jia, W. & Chen, B. (2008). Financial risk, business risk and firm value for logistics industry. WiCOM’08 4th International Conference on Wireless Communications, Networking and Mobile Computing, pp. 1-4.
https://doi.org/10.1109/WiCom.2008.2403
Kashif, M., Iftikhar, S. F. & Iftikhar, K. (2016). Loan growth and bank solvency: evidence from the Pakistani banking sector. Financial Innovation, 2:22, pp. 1-13.
https://doi.org/10.1186/s40854-016-0043-8
Kashyap, A.K., Rajan, R. & Stein, J.C. (2002). Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. The Journal of Finance, Vol. 57 No. 1, pp. 33-73.
https://doi.org/10.1111/1540-6261.00415
Khemraj, T. & Pasha, S. (2009). The determinants of non-performing loans: an econometric case study of Guyana. In: Presented at the Caribbean Centre for Banking and Finance Bi-annual Conference on Banking and Finance. St. Augustine, Trinidad. https://mpra.ub.uni-muenchen.de/53128/1/MPRA_paper_53128.pdf.
Kommunuri, J., Narayan, A., Wheaton, M., & Jandug, L. (2015). Enterprise Risk Management and Firm Performance Empirical evidence from Vietnam.
Kraft, E. & Jankov, L. (2005.) Does speed kill? Lending booms and their consequences in Croatia. Journal of Banking & Finance, 29:105-21.
https://doi.org/10.1016/j.jbankfin.2004.06.025
Leaven, L. & Majnoni, G. (2003). Loan loss provisioning and economic slowdowns: Too much, too late. Journal of financial intermediation, 12:178-97.
https://doi.org/10.1016/S1042-9573(03)00016-0
Levine, R. (2002). Bank-based or market-based financial systems: which is better? Journal of financial intermediation, 11(4), 398-428.
https://doi.org/10.1006/jfin.2002.0341
Levine, R., Loayza, N. & Beck, T. (2000). Financial intermediation and growth: causality and consequences. Journal of monetary Economics, 46(2000):31-77.
https://doi.org/10.1016/S0304-3932(00)00017-9
Lifland, S. (2011). The impact of working capital efficiencies on the enterprise value option: Empirical analysis from the energy sector. Advances in business research, 2(1), pp. 57-70.
Marijana-?urak, M., Pepur, S. & Poposki, K. (2013). Determinants of non-performing loans - evidence from South-eastern European banking systems. Banks & Bank System, 8(1):45-54.
Messai, A. S. & Jouini, F. (2013). Micro and macro determinants of non-performing loans. Int International journal of economics and financial issues, 3(4):852-60.
Nkusu, M. M. (2011). Nonperforming loans and macro financial vulnerabilities in advanced economies (No. 11-161). International Monetary Fund.
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21 (2), 222-237.
https://doi.org/10.1016/j.ribaf.2006.03.007
Pelozo, J. A. I. (2008). Loans, risks, and growth: the role of government and public banking in Paraguay. The Quarterly Review of Economics and Finance, 48(2):307-19.
https://doi.org/10.1016/j.qref.2006.12.009
Rajaraman, I. & Vasishtha, G. (2002). Non-performing loans of PSU Banks: some panel result. Economic and political weekly, pp. 429-435.
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research 22, 203- 224.
https://doi.org/10.1023/A:1019781109676
Shehzad, C. T., de Haan, J., & Scholtens, B. (2010). The impact of bank ownership concentration on impaired loans and capital adequacy. Journal of Banking & Finance, 34(2), 399-408.
https://doi.org/10.1016/j.jbankfin.2009.08.007
Tahir, I. M. & Razali, A. R. (2011). The Relationship between Enterprise Risk Management (Erm) and Firm Value: Evidence from Malaysian Public Listed Companies. International Journal of Economics and Management Sciences. Vol. 1, No. 2, 2011, pp. 32-41.
Tahir, S. H, Shehzadi, I, Ali, I. & Rizwanullah, M. (2015). Impact of bank lending on economics growth in Pakistan: an empirical study of lending to private sector. American Journal of Industrial and Business Management, 5:565-76.
https://doi.org/10.4236/ajibm.2015.58056
Tieman, A. F., & Hardy, D. C. (2008). Innovation in Banking and Excessive Loan Growth (No. 8-188). International Monetary Fund.
Tingbani, I. (2015). Working capital management and profitability of UK firms: a contingency theory approach (Doctoral dissertation, Bournemouth University).
Tinoco-Zermeño, M. A., Venegas-Martínez, F., & Torres-Preciado, V. H. (2014). Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach. Latin American Economic Review, 23(1):8.
https://doi.org/10.1007/s40503-014-0008-0
Torres, J. S. A., & Pabón, A. M. (2013). Loans Growth and Banks´ Risk: New Evidence (No. 010710). Banco De La República.
Wachtel, P. (2001). Growth and finance: what do we know and how do we know it? International Finance, 4(3):353-362.
https://doi.org/10.1111/1468-2362.00077
Zariyawati, M. A., Annuar, M. N., Taifiq, H., & Rahim, S. A. (2009). Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(11), 47-55
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2019-11-04
How to Cite
Ebenezer, O. O., Islam, M. A., Junoh, M. Z. M., & Yusoff, W. S. (2019). Loan Growth, Bank Solvency and Firm Value: A Comparative Study of Nigerian and Malaysian Commercial Banks. Journal of Reviews on Global Economics, 8, 373–386. https://doi.org/10.6000/1929-7092.2019.08.32
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