Factors Influencing the Growth of Non-Performing Loans. Fresh Evidence from Rwanda, Autoregressive Distributed Lag Approach

This study empirically examined the link between the quality of the loans and their determinants in the banking sector in Rwanda. The study used quarterly time-series data collected from the National Bank of Rwanda (BNR) and National Institute of Statistics of Rwanda (NISR) from Quarter1, 2012, to Quarter 4, 2021, in Rwanda. ARDL-ECM was used to estimate the long and short-run relationships between variables of interest. Several tests, such as Bound/Co-integration and Toda-Yamamoto Causality, were tested in this study. Impulse responses were also conducted. Empirical results indicated that both exchange rate, lending interest rate and inflation rate statistically affect the non-performing loans ratio in the short and long run. Furthermore, the analysis indicated that the Loans to Deposits Ratio and Capital Adequacy Ratio have no statistically significant effect on the Non-Performing Loans Ratio. The short-run impact of the Dummy of the COVID-19 pandemic introduced in the model was prevalent and found to be negatively correlated with NPLs in the long run, from which we recommend further studies to ascertain the direction of its causal effect. The results indicated that previous deviation or shock from the long-run equilibrium will be corrected in the current period. As policy implications, the study suggests that Banks should cut interest rates on loans to make them less expensive for borrower's to meet their commitments. Furthermore, the Regulatory Authority should put more effort into stabilizing the inflation and exchange rates, which were found to exert a strong and positive impact on the Non-Performing Loans Ratio.