Impact of Macro Economy on Financial Stability in Malaysia

Sebastiana Viphindrartin


Abstract : The purpose of this study is to investigate inflation, exchange rates, interest rates and bankspecific factors (credit) against the Non-Performing
Loan (NPL) of Rural Banks in Malaysia for the period 2015 to 2018. This study uses the Vector Error Correction Model (VECM) using secondary data from the world bank. We find that the NPL Variable provides a positive and significant response to credit increases in the short and long term. This means that high and low credit levels lead to high and low NPL levels. The inflation variable used as a macroeconomic indicator has different effects on the level of NPL in the short and long term. In the short run, variable inflation is detrimental to the NPL level. This means that the increase in the inflation rate does not affect the NPL
level. Meanwhile, in the long term, inflation has a positive and significant effect on the NPL level. That is, an increase in the inflation rate increases the NPL
level. Inflation that increases this increase is caused by government policies to increase the price of goods which causes prices to also rise. Then this can affect
people's purchasing power so that the business world weakens. Resulting in hampered credit.

Keywords : Rural Banks, Macroeconomic Indicators, NPLs, Financial System Stability, VECM

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