Determinants of Credit Infections: Evidence from Banking Sector in an Emerging Economy

Abstract

This paper applies dynamic panel estimates on 22 commercial banks in Pakistan to determine the factors that affect their asset quality. Consequently, the study tests for a comprehensive array of both bank-specific and macroeconomic variables collected quarterly from 2008 to 2016. The empirical analysis confirms that bad asset quality can be explained by retarded GDP growth and unfavorable movement in exchange and lending rates. Within the bank-specific variables, non-performing loans are the most responsive to loans to the agriculture and energy sectors, level of capitalization, size of the lending institution and quality of management.