Impact of Innovation on Nonperforming Loans of the Banking System: Evidence from International Countries

Abstract

This paper examines the impact of innovation on non-performing loans in the banking sector. Specifically, innovation has the potential to either limit banks’ lending activities or enhance their operational efficiency, both of which may contribute to a reduction in non-performing loans. Utilising a dataset comprising 120 countries over the period from 2013 to 2020, the study provides empirical evidence supporting this hypothesis. The results remain robust even after addressing endogeneity concerns through the application of alternative regression techniques, including instrumental variables and system generalized method of moments models. Additionally, the study highlights that the impact of innovation on non-performing loans is more pronounced in countries with lower levels of corruption, whereas its effects may be diluted in high corruption contexts. These findings offer significant policy implications, emphasising the importance of fostering innovation and reducing corruption to promote sustainable banking practices and economic growth.