An Investigation of the Relationship Between Non-Performing Loans, Macroeconomic Factors, and Financial Factors in Context of Private Commercial Banks in Bangladesh

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AN INVESTIGATION OF THE RELATIONSHIP BETWEEN NON-PERFORMING LOANS, MACROECONOMIC FACTORS, AND FINANCIAL FACTORS IN CONTEXT OF PRIVATE COMMERCIAL BANKS IN BANGLADESH

by

Syeda Zabeen Ahmed ID # 0120269

An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration

INDEPENDENT UNIVERSITY, BANGLADESH April 2006

An investigation of the relationship between Non-performing Loans, Macroeconomic Factors, and Financial Factors in context of Private Commercial Banks in Bangladesh

by

Syeda Zabeen Ahmed ID # 0120269

has been approved April, 2006

_________________ Shubhankar Shil Lecturer School of Business Independent University, Bangladesh

TABLE OF CONTENTS
Page List of Tables Abstract 1. Introduction 2. Problem Statement 3. Purpose of the Study 4. Limitations of the Study 5. Research Timeline 6. Review of Literature 6.1 Non-performing Loans 6.2 Development of hypotheses 6.3 Macroeconomic factors and NPLs 6.4 Bank specific indicators and NPLs 6.5 Terms of Credit and NPLs 7. Methodology 7.1 Research Approach 7.2 Sampling Method 7.3 Measure of variables 7.4 Data Collection Procedure 7.5 Data Analysis 8. Results 8.1 Descriptive 8.2 Correlations 8.3 Regression 9. Significant of the Study 11. Conclusion Reference Appendix 1 I 1 1 2 2 3 3 3 4 5 6 7 7 8 8 8 8 9 9 10 10 11 12 13 13 14 16

List of Tables
Page 1. Demographics of respondents 2. Occupational experience of respondents 3. Responsibility statements 4. Reliability statements

12 24 25 26 29

5. Decision usefulness

An investigation of the relationship between Non-performing Loans, Macroeconomic Factors, and Financial Factors in context of Private Commercial Banks in Bangladesh

Abstract
Based on the studies by Ranjan, and Dhal (2003), this study aims to investigate the relationship between Non-performing Loans, Macroeconomic Factors, and Financial Factors in context of Private Commercial Banks in Bangladesh . The empirical analysis evaluates as to how banks’ non-performing loans are influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. The findings prove support to the hypotheses that bank size and horizon of loan maturity has negative influence on non-performing loan. The other variables considered do not have any significant influence on non-performing loan. Only 15 banks have been selected. The future study can undertake the same study with larger sample size.

Introduction
Financial sector of Bangladesh, like most developing countries, is dominated by banking enterprises. Banks at early stages of history of Bangladesh were nationalized and there was mismatch between assets and liabilities. The central bank of the country had limited tools to manage monetary policy. Direct tools namely determination of SLR/CRR, administered interest rate policy and moral suasion were the man instruments of monetary policy (Ahmed, 2005). Most banks pursued a policy of financial deepening through extending bank branches to the remote and rural areas without considering financial viability. In this situation, causality between economic growth and performance of the financial sector could not be established. There was a major policy shift in early 1980s when private sectors banks were allowed in the country (Ahmed, 2005). In addition to the existing 19 public sector and foreign banks, 10 new private banks opened their business during early 1980s. Thereafter, another 7 and 13 banks started commercial banking in the country during mid-1990s and early 2000s respectively. The sector embarked upon a Financial Sector Reform Program in the 1990s which primarily aimed at entrusting additional powers to the central bank by strengthening efficacy of its instruments (Ahmed, 2005). Interest rates were liberalized; open market operation was activated by introducing new bills. Attempts

were made to improve...
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