Factors Influencing Non-Performing Loans between Islamic and Conventional Banks in Malaysia

This study reveals the long-term effects of several variables on Non-Performing Loans (NPLs) in Islamic banks (IBs) and conventional banks (CBs) in Malaysia. Using the Autoregressive Distributed Lag (ARDL) technique, the study supports a proactive approach and finds a persistent association between NPLs and asset quality, loan quality, unemployment rate, and inflation rate. Using the ARDL approach, the analysis covers the monthly period from 2018 to early 2021. This study aims to investigate NPLs at two different times: before and after the COVID-19 epidemic. The findings indicate that The ARDL model identifies Loan Quality 1 and 2 as significant influencers of NPLs in Malaysia's CBs. At the same time, asset quality and the unemployment rate show no significant impact. In contrast, IBs show a strong positive correlation between Asset Quality and NPL, with economic factors like the Unemployment Rate and Inflation Rate significantly affecting NPL, reflecting the unique risk-sharing nature of Islamic finance. These findings necessitate improved risk management strategies in both banking sectors.