ANALYSING THE EFFECTS OF INTEREST RATE AND RESERVE REQUIREMENT RATIO ON BANK CREDIT RISK IN NAMIBIA
Date
2020-09-28
Authors
ANDREAS, AILI
Journal Title
Journal ISSN
Volume Title
Publisher
UNVERSITY OF NAMIBIA
Abstract
The study assessed the effect of monetary policy instruments (interest rates and reserve
requirements) on banking institutions risk, measured in terms of non-performing loans. The
study used quarterly data from Bank of Namibia from 2001Q1 to 2017Q3. The study employed
the Autoregressive Distributive Lag (ARDL) lag model to determine the effects. Since the reserve
requirements is seldom used in Namibia and ever kept at one percent of the bank’s total
liabilities to the public, it was considered dormant. Therefore, shocking the reserves
requirements up-or down-wards is not plausible in the Namibian economy. The variables
considered are non-performing loans (NPL), as a dependent variable and interest rates (I),
banks tier I capital (CA), banks’ total assets (TA), gross domestic product (GDP), and private
credit extension (CR); as the explanatory variables. The results indicate that there is a short run
negative effect between interest rates and bank risk, which implies that the low rate would
increase the bank’s non-performing loans. The negative relationship indicates that low inflation
or price stability does not guarantee financial stability in the economy. The Granger causality
results indicate non-causality between interest rates and bank risk, but interest rates Granger
cause economic growth and private sector credit that have a direct effect to bank risks.
Description
Monetary Economics