The Impact of Non-Performing Loans of Public and Private Banks on Economic Growth in Iran

Document Type : Scientific paper

Authors

1 Associate professor, Department of Economics, Payame Noor University, Tehran, Iran

2 PhD Student in Economics, Payame Noor University, Tehran, Iran

Abstract

The banking industry is one of the most important and fundamental sectors of the economy and the main bedrock for the growth and dynamism of the financial system and consequently economic growth and development. One of the problems that various countries, including Iran, are facing in the current situation is the increase in         non-performing loans of banks in relation to the total loans granted in the banking system, which indicates an increase in credit risk, reduced quality of assets of this system and possible financial stabilization in the future. The ratio of non-performing loans has different effects on macroeconomic variables due to the different functions of private and public banks. On the other hand, one of the most important macroeconomic variables, economic growth means a continuous increase in the level of production of society, which reflects the level of welfare and economic power of any society. If the non-performing loans increase, the lending power of banks wil decrease while increasing the need for public and private reserves of banks to manage its risk. This will reduce the possibility of financing in the economy and the country's economic growth. In this study, using the Fully Modified Ordinary Least Squares Method (FMOLS), the effect of the increase of non-performing loans by public and private banks on Iran's economic growth is shown. The results of this study show that increasing the ratio of non-performing loans of public and private banks has similarly reduced Iran's economic growth. Also, private sector credit, employees with university degrees and gross fixed capital formation have a positive effect on economic growth while price index and government size have a negative effect on it.

Keywords

References

Adu, G., & Marbuah, G., & Mensah, J. T. (2013). Financial development and economic growth in Ghana: Does the measure of financial development matter? Review of Development Finance, 3(4), 192-203.
Aghaii, M., & Rezagholizadeh, M. (2016). Investigating the factors affecting the amount of overdue claims of selected branches of Sepah Bank. Islamic Studies and Banking, 2(3), 95-111. (In Persian)
Ahmad, M., & Rizwan, A., & Ramiz, R. (2016). Non-performing loans and economic growth. Scholars Journal of Economics, Business and Management, 3(10), 584-586.
Ahmadian, A. (2017). Vulnerability of economic growth from the credit risk management crisis in the banking system. Islamic Financial Studies and Banking, 3(6-7), 59-93. (In Persian)
Akinboade, O. A. (1998). Financial development and economic growth in Botswana: a test for causality. Savings and Development, 22(3), 331-348.
Alipour, B., & Pedram, M., & Charghanian, I. (2013). Study of short-term and long-term impact of government size on Iran's economic growth during 1353-1390 with a bounds testing approach, Iranian Economic Research, 54, 27-53. (In Persian)
Apan, M. (2019). Determining the relationship between non-performing loans, economic growth and asset size: an application in Turkish participation banking sector, Afro Eurasian Studies Journal, 8(1), 106-123.
Baharvandi, A., & RanjbarFallah, M., & AbolhassaniHastiani, A. (2016). Study of the relationship between non-performing loans of banks and interest-free banking operations in Iran. National Islamic Research, 5(2), 39-74. (In Persian)
Balgova, M., & Nies, M., & Plekhanov, A. (2016). The economic impact of reducing non-performing loans, European Bank for Reconstruction and Development, 193, 1-45.
 Beck, T., Levine, R., & Loayza, N. (2000). Finance and the sources of growth. Journal of Financial Economics, 58(1), 261-300.
Beck, T., & Levine, R. (2004). Stock markets, banks and growth: panel evidence. Journal of Banking & Finance, 28(3), 423-442.
Boyd, J. H., & Prescott, E. C. (1986). Financial intermediary-coalitions. Journal of Economic Theory, 38(2), 211-232.
Central Bank of the Islamic Republic of Iran. (2019). Summary of Economic Changes. (In Persian)
Central Bank of the Islamic Republic of Iran. (2019). National Accounts of Iran. (In Persian)
Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth: evidence from panel unit root and cointegration tests. Journal of Development Economics, 73(1), 55-74.
Chude, N. P., & Chude, D. I. (2014). The implications of nonperforming loans on Nigerian economic growth (1992-2009). Journal of Business and Management, 16(2), 6-11.
De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433-448.
Dehmardeh, N. & Safdari, M. & Shahikitash, M. (2010). The effect of macro indicators on income distribution in Iran. Journal of Business Research, 54, 25-55. (In Persian)
Dejpasand, F. (2005). Factors affecting Iran's economic growth. Journal of Economic Research, 5(18), 13-47. (In Persian)
Dudian, M., & Popa, R. (2013). Financial development and economic growth in central and eastern Europe. Theoretical and Applied Economics, 8(585), 59-68.
Elmi, Z., & Jamshidnezhad, A. (2005). The impact of education on Iran's economic growth. Journal of Humanities and Social Sciences, 26, 135-154. (In Persian)
Erdogdu, A. (2016). Assessing the impact of non-performing loans economic growth in Turkey. American Research Journal of Business and Management, 2016, 1-8.
Espinoza, R., & Prasad, A. (2010). Nonperforming loans in the GCC banking system and their macroeconomic effects. IMF Working Paper, 10(224), 1-24.
Farahanifard, S., & Feshari, M., & Khanzadeh, Y. (2015). The impact of Islamic banking and non-banking financial institutions on economic growth in Iran. Economic Modeling, 31, 21-41. (In Persian)
Goldsmith, R. 1969). Financial structure and economic development. Yale University Press.
Greenwood, J., & Jovanovic, B. (1990). Financial development and economic development. Economic Development and Cultural Change, 15, 257-268.
Hondroyiannis, G., & Lolos, S., & Papapetrou, E. (2005). Financial markets and economic growth in Greece. Journal of International Financial Markets, Institutions and Money, 15(2), 173-188.
Inekwe, M. (2013). The relationship between real GDP and non-performing loans: evidence from Nigeria (1955-2009). International Journal of Capacity Building in Education and Management, 2(1), 1-7.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamic and Control, 12(2-3), 231-254.
Kjosevski, J., & Petkovski, M. (2017). Non-performing loans in Baltic States: determinants and macroeconomic effects. Baltic Journal of Economics, 17(1), 25-44.
Kordmanjiri, S., & Dadashi, I., & Khoshnood, Z., & Gholamniaroshan, H. (2016). Identification of factors affecting non-performing loans of banks using neural networks and support vector machine algorithm. Economic Modeling, 49, 127-151. (In Persian)
Levine, R. (1997). Financial development and economic growth: views and agenda. Economic Journal, 2, 90-107.
McKinnon, R. I. (1988). Financial liberalization and economic development: a reassessment of interest-rate-policies in Asia and Latin America. Oxford Review of Economic Policy, 5(4), 29-54.
Mehrabi, L. (2014). Assessing the status of non-performing loans in the Iranian banking system and comparing it with other countries: a review of the experiences of other Islamic countries. Monetary and Banking Research Institute of the Central Bank of the Islamic Republic of Iran. (In Persian)
Mehrabi, L. (2015). Statistics of non-performing loans in the Iran's banking system. Economy New, 144, 131-135. (In Persian)
Mehrabian, A., & Seifipour, R. (2016). Analysis of performing loans in the Iranian banking system. Journal of Financial Economics, 10(36), 73-85. (In Persian)
Mirzaei, E., & Mohammadi, T., & Shakeri, A. (2016). The relationship between non-performing loans of banks and macroeconomic conditions: a panel vector auto regression approach. Journal of Economic Research, 16(60), 183-220. (In Persian)
Mohammadi, T. (2011). Common error in the application of time series models: improper application of the ARDL model. Journal of Iranian Economic Research, 47, 163-183. (In Persian)
Mohammadi, T., & Nabizadeh, A. (2013). Study of the relationship between real exchange rates and imports of intermediate, capital and consumer goods in Iran. Journal of Economic Research, 51, 113-149.‌ (In Persian)
Mohseni, R., & Fathian, M. (2017). The impact of fluctuations of selected macro variables on performing loans banking. Journal of Islamic Financial Studies and Banking, 3(6-7), 95-130. (In Persian)
Morakianyo, A. E., & Sibanda, M. (2016). Non-performing loan and economic growth in Nigeria: a dynamic analysis. Journal of Economics and Business, 66(4), 61-81.
Muthami, A. M. (2016). Relationship between non-performing loans and economic growth: a case study of commercial banks in Kenya, University of Nairobi
Nyasha, S., & Odhimbo, N. (2015). Financial system and economic growth: empirical evidence from Australia. Economic Research, 5, 1-20.
Odhiambo, N. M. (2010). Finance-investment-growth nexus in South Africa: an ARDL-bounds testing procedure. Economic Change and Restructuring, 43(3), 205-219.
Patricia, N., & Izuch, U. (2014). The implication of non-performing loans on Nigerian economic growth (1992-2009).  Journal of Business and Management, 16(2), 6-11.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2000). Structural analysis of vector error correction models with exogenous I (1) variables. Journal of Econometrics, 97(2), 293-343.
Phillips, P., & Hansen, B. (1990). Statistical inferences in instrumental variables regression with I (1) processes, Review of Economic Studies, 57(1), 99-125.
Robinson, J. (1956). The Accumulation of Capital. Palgrave Macmillan Press.
Shaabani, A. & Jalali, A. (2011). Reasons for the spread of non-performing loans in the Iranian banking system and expressing solutions to improve it. Journal of Planning and Budget, 16(4), 155-181. (In Persian)
Schumpeter, J. A. (1936). The general theory of employment, interest and money. Journal of the American Statistical Association, 31(196), 791-795.
Schumpeter, J. A. (1969). The theory of economic development: an inquiry into profits, capital, credit, interest and business cycle. Oxford University Press.
Tashkini, A. (2005). Applied econometrics using microfit. Dibagaran Cultural Institute (In Persian)
Waqabaca, C. (2004). Financial development and economic growth in Fiji. Reserve Bank of Fiji.
Zamanzadeh, H. (2012). Five decades of ups and downs of production. Journal of New Economics, 136, 202-204. (In Persian)
Zeng, S. (2012). Bank non-performing loans (NPLs): a dynamic model and analysis in China. Modern Economy, 3, 100-110.
Zhang, J., & Wang, L., & Wang, S. (2012). Financial development and economic growth: recent evidence from China. Journal of Comparative Economics, 40(3), 393-412.
Zolghadr, H., & Asgharpour, H., & Pourebadolhan, M., & Salmani, B., & FarzinVash, A. (1398). Study of the role of bank ownership in the impact of bank credit on economic growth according to the income level of the provinces. Research on Economic Growth and Development, 9(34), 15-34. (In Persian)
Macroeconomics Research Letter
Volume 16, Issue 31
August 2021
Pages 155-178

Files

History

  • Receive Date: 01 August 2021
  • Revise Date: 28 January 2022
  • Accept Date: 30 January 2022

Share

How to cite

Statistics