ANALYSING THE EFFECTS OF INTEREST RATE AND RESERVE REQUIREMENT RATIO ON BANK CREDIT RISK IN NAMIBIA

Aili Andreas

Working Papers from African Economic Research Consortium

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.

Date: 2020-09-28
Note: African Economic Research Consortium
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