Household sector impaired financing determinants of Malaysian Islamic and conventional banks

While easy access to credit markets and ample liquidity motivate high credit consumption by bank borrowers, they inevitably expose Malaysian banks to financial fragility due to the high default rate of households. Malaysia persistently faces higher household debt to GDP ratio compared to other nations and this is a national issue. This study primarily investigated the influence of bank-specific and
economic factors on the household-impaired loans of 21 conventional banks and household -impaired financing of 16 Islamic banks. The study period was from 2006 to 2016. Employing the panel data analysis technique, this study found that for Islamic banks, lag household-impaired financing, Return on Asset, and Financing Loss Provision are significant and positive while Financing Growth (FGROWTH) has a negative impact on household-impaired financing. For conventional banks, lag
household- impaired loan, household loan and loan loss provision are positive and significant. Conversely, ROA, size, and Loan Growth (LGROWTH) have negative, significant impacts on household -impaired loan. On a pool basis, CPI and BLR are two significant economic factors. Meanwhile, 7 bank- specific factors; lag household -impaired loan, household loan, regulatory capital, ROA, size, LLP and LGROWTH emerge highly significant. On the contrary, Islamic banks results show 3 macro factors; income, CPI, and BFR, and 3 bank specific factors, namely lag household -impaired financing, ROA, FLP and FGROWTH are significant
determinants of household -impaired financing. These are contributions to new knowledge premised on self-developed database on Malaysian banks’ household debt. The marked differences in the results indicate significant different policy and
practical implications for Islamic and conventional banks in managing their household credit risk. For policy- makers, appropriate monetary policies are desired to oversee national household debt prudently. Meanwhile, practitioners need to
develop better governance and credit guidelines to manage their household-impaired financing/loan.