Impact of Interest Rate Volatility on Non-Performing Loans in Pakistan

Siddiqui, Saad; Malik, Kamran Shahzad; Shah, Syed Zulfiqar Ali
February 2012
International Research Journal of Finance & Economics;Feb2012, Issue 84, p66
Academic Journal
Volatility in borrowing cost may lead to unpredictability of inflows and outflows for the borrower who may pocket something extra in case of lower interest rates on one side or reach to the levels of unaffordability on the other side leading to defaults and ultimately contributing to the non-performing loan portfolios of the lenders having devastating implications on the economy. Based on this concept, this study is conducted focusing Pakistan where non-performing loans are increasing at an uncontrollable pace. Impacts of the volatility of macroeconomic indicator i.e. interest rates charged to borrowers is measured for the period 1996Q4 to 2011Q3 through GARCH. Regression results sketch a picture concluding NPLs are affected but not absolutely by the volatility of lending rates charged by the lenders in the market. Nevertheless, other macroeconomic factors are also suggested to be studied in addition to selected variables where this study is first of its kind opening doors for future research on non-performing loans in Pakistan's banking sector.


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