Impact of Country Governance on Non-Performing Loans in Lower-Middle-, Upper-Middle- And High-Income Countries

Abstract

This study aims to determine the effects of the country governance on NPLs in lower-middle-, upper-middle- and high-income countries. Using the panel corrected standard error (PCSE) estimation method, this study finds that control of corruption, government effectiveness, rule of law, and regulatory quality can reduce NPLs significantly in high-income and upper-middle-income countries; regulatory quality and control of corruption play the highest role in high-income and upper-middle-income countries respectively. This study also finds significant positive associations between the two governance indicators (control of corruption and rule of law) and NPLs in lower-middle-income countries, and only political stability and absence of violence/terrorism are found marginally significant in the control of the same in this group. To sum up, the impacts of country governance indicators on NPLs differ among three groups of countries. The findings of this study have implications for policy formulation for the banking sector in those groups of countries.