Loan Officer Incentives, Internal Rating Models, and Default Rates*

2019 ◽  
Vol 24 (3) ◽  
pp. 529-578 ◽  
Author(s):  
Tobias Berg ◽  
Manju Puri ◽  
Jörg Rocholl
Keyword(s):  
Order Effect ◽  
Foreign Exchange Rates ◽  
Bank Profitability ◽  
Return On Equity ◽  
Hard Information ◽  
Default Rates ◽  
Internal Rating ◽  
Loan Officer ◽  
Bank Behavior ◽  
Loan Officers

Abstract Manipulation of hard information has been at the center of a wave of investigations into fraudulent bank behavior, such as mis-selling of mortgages and rigging of London Interbank Offered Rate and Foreign Exchange rates. Despite these prominent cases, little is known as to why employees manipulate hard information. Using almost a quarter million retail loan applications, we show that loan officers who face volume-based incentives significantly manipulate ratings even in settings where ratings are computed using hard information only. Manipulation is widespread across loan officers, with low-performing loan officers manipulating more toward the end of the year. These incentives have a first-order effect on bank profitability, reducing return on equity by 1.5 percentage points. We conclude that reliance on hard information does not overcome loan officer agency problems, and it is important for banks and regulators to take manipulation of hard information into account when using hard information for risk assessment and regulation.

Does Bank Profitability Stimulate Economic Growth in the Arab Region?

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Omar Ghazy Aziz
Keyword(s):  
Financial Development ◽  
Method Of Moments ◽  
Positive Impact ◽  
Generalized Method Of Moments ◽  
Arab Countries ◽  
Return On Assets ◽  
Bank Profitability ◽  
Arab Region ◽  
Return On Equity ◽  
The Impact

AbstractThis study empirically investigates the impact of bank profitability, as a complementary measure of financial development, on growth in the Arab countries between 1985 and 2016. Using a generalized method of moments (GMM) estimation to test the impact of the bank profitability on growth, this study utilises two variables in the econometric model which are return on assets and return on equity. This study reveals that both variables of bank profitability are positive and significant. This confirms that the bank profitability, beside other financial development variables, has positive impact on the growth. This study points out some important implications based on this result.

Loan officer rotation and credit access: evidence from Madagascar

2019 ◽  
Vol 80 (1) ◽  
pp. 51-67
Author(s):  
Yaw Sarfo ◽  
Oliver Musshoff ◽  
Ron Weber
Keyword(s):  
Rural Areas ◽  
Urban Areas ◽  
Frequency Effect ◽  
Content Type ◽  
Credit Access ◽  
Loan Officer ◽  
Microfinance Institution ◽  
Lending Decisions ◽  
Loan Officers ◽  
Loan Approval

Purpose With exclusive data from a commercial microfinance institution (MFI) in Madagascar, the purpose of this paper is to investigate if loan officer rotation (change of loan officer) has an effect on credit access (loan approval) in rural and in urban areas. The authors further analyze how the frequency of loan officer rotation affects credit access in rural and in urban areas. Design/methodology/approach The authors apply propensity score matching to compare credit access between loan applicants who experienced loan officer rotation and loan applicants who experienced no loan officer rotation in rural and in urban areas. Findings Results show that loan officer rotation has a positive and statistically significant effect on credit access. The authors observe further that loan officer rotation has a different effect on credit access in rural and in urban areas. Whilst rural loan applicants who experienced loan officer rotation are more likely to have credit access, urban loan applicants show no statistically significant effect of loan officer rotation on credit access. For the frequency effect on credit access, the authors observe that one loan officer rotation has a positive and statistically significant effect on credit access whereas results are mixed for two loan officer rotations. Research limitations/implications Even though the authors can show that loan officer rotation can improve credit access to loan applicants, especially in rural areas, the conditions in Madagascar are unique. Therefore, results need to be verified in other countries and institutional contexts. Practical implications From the perspective of MFI, the authors recommend that the management of MFI needs to provide better tools to loan officers to improve on the evaluation of agricultural loan products or standardize the assessment of agricultural loan products to improve on lending decisions. Further, if applicable, the authors recommend that MFI should consider using credit worthiness assessment procedures which rely less on loan officer’s judgment for loan evaluation, such as automated systems. From the perspective of loan applicants, the authors recommend that loan applicants should request for a change of loan officer if they experience successive loan applications rejection. Originality/value To the authors’ knowledge, this paper is the first to provide empirical evidence on the effect and frequency of loan officer rotation on credit access in Sub-Sahara Africa, and Madagascar, in particular.

scholarly journals Corporate Governance, Political Connections, and Bank Performance

2019 ◽  
Vol 7 (4) ◽  
pp. 62 ◽  
Author(s):  
Haris ◽  
Yao ◽  
Tariq ◽  
Javaid ◽  
Ain
Keyword(s):  
Corporate Governance ◽  
Profit Margin ◽  
Political Connections ◽  
Return On Assets ◽  
Board Size ◽  
Bank Profitability ◽  
Return On Equity ◽  
Net Interest Margin ◽  
The Impact ◽  
Interest Margin

This study investigates the impact of corporate governance characteristics and political connections of directors on the profitability of banks in Pakistan. The study uses the data of 26 domestic banks over the latest and large period of 2007–2016. Our findings firstly affirm that bank profitability is negatively affected by the presence of politically connected directors on the board, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin. Secondly, our findings also affirm the negative political influence on the sustainability of the banking industry, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin during the government transition of banks having politically connected directors sitting on their board. Our findings further report an inverted U-shaped relationship between board size and bank profitability, suggesting that a board size beyond 8–9 members decreases the profitability. The study further finds a positive impact of board composition, board independence, and director compensation on bank profitability, while also finding a negative impact of frequent board meetings, presence of foreign directors, and audit committee independence.

scholarly journals The Impact of Specific Banking, Industrial and Macroeconomic Factors on Bank Profitability: Evidence from the Albanian Banking System

2019 ◽  
Vol 9 (2) ◽  
pp. 182
Author(s):  
Gazmend Nure
Keyword(s):  
Banking System ◽  
Short Term ◽  
Bank Profitability ◽  
Macroeconomic Factors ◽  
Return On Equity ◽  
Specific Factors ◽  
The Impact ◽  
Research Studies ◽  
Bank Profits

This research studies the factors that affect the profitability of the banking system in Albania during the period 2012-2017.The specific factors taken in the study are divided into two groups: the specific banking factors (internal), and the macroeconomic factors. The dependent variable used in the study, to measure Bank Profits, is Return on Equity (ROE). The empirical findings show that, when ROE is used as a dependent variable, all bank specific variables are negatively and significantly related to profitability. That being said, there is the exception of the liquidity factor (Liquid assets over short term liabilities) and bank size which has a positive.

scholarly journals Loan Officer and the Evolution of Bank-SMEs Relationship in Tunisia

2021 ◽  
Vol 13 (9) ◽  
pp. 41
Author(s):  
Fredj Fhima ◽  
Walid Trabelsi
Keyword(s):  
Decision Making ◽  
Average Length ◽  
Self Esteem ◽  
Decision Making Process ◽  
Motivating Factors ◽  
Private Bank ◽  
Loan Officer ◽  
Credit Demand ◽  
Loan Officers

This paper empirically investigates the role of the loan officer in the evolution of the bank-SMEs relationship and its motivation for studying credit demand, its level of alignment to the hierarchy and its participation in the decision-making process. Based on a survey of 160 loan officers from two large Tunisian commercial banks: the ‘Société Tunisienne de Banque’ (STB) – as a public bank, and the ‘Banque Internationale Arabe de Tunisie’ (BIAT) – as a private bank, data analysis shows that self-esteem, need for success, autonomy in performing duties, and participation in the decision-making process are motivating factors at work for loan officers at both banks. The number of visits to the premises of the SME and the average length of interviews with its manager are considered important for the acquisition of soft information. Regarding the decision-making power, while a certain delegation has been instituted at the regional level in the BIAT, it is more the responsibility of the central committees in the STB. The decision of evolution depends more on the hierarchical superiors in a private bank that is why the BIAT officers are closer to their superiors than those of the STB.

scholarly journals Human capital and credit risk management: training is more valuable than experience

2019 ◽  
Vol 17 (1) ◽  
pp. 67-77
Author(s):  
Ghassen Bouslama ◽  
Christophe Bouteiller
Keyword(s):  
Risk Management ◽  
Human Capital ◽  
Credit Risk ◽  
Default Risk ◽  
Management Training ◽  
Credit Risk Management ◽  
Risk Monitoring ◽  
Loan Officer ◽  
Loan Officers

The aim of this article is to assess how human capital, and more specifically training and experience, helps in forecasting and monitoring credit risk. It uses a survey of a sample of loan officers in a major French mutualist bank and applies analysis of variance and correlation to determine the relationships among variables. The study of these two components of human capital in SME loan officers shows that their ability to anticipate risk depends above all on their training rather than on their experience. Some methods of anticipating risk are more important than others. Loan officers monitor their clients in similar ways, whatever the degree and nature of their experience. The findings have two important implications for credit risk management and human capital: first, both technical and regulatory training is crucial to enable loan officers to anticipate bank credit risk, second, experience, whether in banking or as a loan officer, only makes a difference in monitoring risk. These results will be useful when banks are planning recruitment, career management and resource and skills allocation. They also suggest that staff knowledge management will enable banks to use their human capital effectively to reach their own objectives with regard to risk control, and those fixed by the regulators. This work is, as far as it is known, the first to study the role of human capital in managing credit risk. The authors show that training is more important than experience in default risk anticipation, but that experience is useful in risk monitoring.

How multiple large shareholders affect bank profitability under the dispersion and the coalition hypotheses? An insight from the MENA region

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rim Boussaada ◽  
Abdelaziz Hakimi
Keyword(s):  
Method Of Moment ◽  
Mena Region ◽  
Return On Assets ◽  
Bank Profitability ◽  
Content Type ◽  
Return On Equity ◽  
Large Shareholders ◽  
Conventional Banks ◽  
Generalized Method Of Moment ◽  
Ownership Composition

PurposeThe aim of this paper is to examine whether multiple large shareholders and their interactions affect bank profitability in the MENA region.Design/methodology/approachTo achieve this goal, we used a sample of conventional banks in the MENA region observed during the period 2004–2015. We performed the System Generalized Method of Moment as the empirical approach.FindingsEmpirical results indicate that under the dispersion hypothesis, multiple large shareholders (MLS) tend to reduce bank profitability for both return on assets (ROA) and return on equity (ROE). However, under the alignment of interests’ hypothesis, coalition between the first and the second largest shareholder increases bank profitability only for ROA. We also find that an additional large shareholder, beyond the two largest, reduces bank return equity.Originality/valueTo the best of our knowledge, to date, there is no study that investigates the effect of MLS and the bank profitability in the MENA region. Indeed, this study shows the importance of considering ownership composition among large shareholders in banking studies.

Influence of Islamic Auto Financing Instruments on Financial Performance of Commercial Banks in Isiolo County Kenya

2021 ◽  
Vol 6 (1) ◽  
pp. 70-85
Author(s):  
Abdi Huka Halake ◽  
Dr. Nancy Rintari ◽  
Fredrick Mutea
Keyword(s):  
Financial Performance ◽  
Customer Service ◽  
Commercial Banks ◽  
Secondary Data ◽  
Unique Contribution ◽  
Validity And Reliability ◽  
Policy And Practice ◽  
Loan Officer ◽  
Loan Officers ◽  
Isiolo County

Purpose: The purpose of the study was to explore the influence of Islamic auto financing instruments on financial performance of commercial banks in Isiolo County Kenya. Methodology: This study used descriptive research design. The respondents were customer service officers and loan officers in the ten commercial banks in Isiolo County. They were be selected using census method. Data collection was done using closed-ended questionnaires and secondary data collected through analysis of report from 2017 to 2020. To ensure validity and reliability, pre-testing of questionnaires was done at Kenya Commercial Bank in Meru town. Coded data in SPSS 24.0 computer program analyzed quantitative and qualitative data using the descriptive statistics such as mean, percentage and standard deviation. Multiple regression was used to test hypothesis of the study. Tables, graphs and detailed explanations were used to present the final results of the study. Results: Options had a statistically significant relationship with financial performance. The respondents agreed that the lending terms of Islamic automobile financing have attracted diverse clients (mean of 4.78). However, in comparison with other statements, the respondents did not tally that having sharia committee in disbursing car loans had enabled clients have confidence with the automobile loans (mean of 3.83). The R value was 0.862 and R-square of 0.743. This indicated that Islamic auto financing instruments’ level of contribution towards financial performance was 74.3%. The Durbin- Watson value was 1.969. This value lied between 0 and 2 hence indicating that there was a positive correlation between auto financing instruments and financial performance. The significance value was 0.000 which was below 0.05 hence Islamic Auto financing instruments had a significant influence of financial performance. In addition, the respondents did not tally that having sharia committee in disbursing car loans had enabled clients have confidence with the automobile loans. This proved that the confidence that clients had on auto financing, was not purely on the nature and process of administration of the financing but also due to reliability. Unique contribution to theory, policy and practice: The study recommends that auto financing should be provided reliably by ensuring all client concerned are amicably handled by the banking staff. The various car loan officer should be trained on good customer service to as to ensure they sell well their products without necessarily losing new clients. The bank management should also diversify auto financing to cater for all categories of vehicles for expansion of their client base.

CAMEL RATIO ON PROFITABILITY BANKING PERFORMANCE (MALAYSIA VERSUS INDONESIA)

2017 ◽  
Vol 3 (1) ◽  
pp. 30-39
Author(s):  
Maryam binti Badrul Munir ◽  
Ummi Salwa Ahmad Bustamam
Keyword(s):  
Capital Adequacy ◽  
Return On Assets ◽  
Comparative Performance ◽  
Bank Profitability ◽  
Return On Equity ◽  
Short Period ◽  
Equity Ratio ◽  
Asset Quality ◽  
Descriptive Method ◽  
Interest Expense

Purpose: This research analyzed about profitability banks performance based on the CAMEL (Capital Adequacy, Asset Quality, Management, Earnings and Liquidity) on the Bank's profitability. Capital adequacy measured by debt equity ratio (DER) and non-performing loans (NPL), asset quality measured by return on assets (ROA), management will be measured by cost per income, earnings measured by return on equity (ROE) and liquidity measured by interest expense and deposit.Methodology: The samples were 114 samples (from 10 bank in Malaysia and 9 bank in Indonesia) since 2010-2015. This analysis used descriptive method and multiple regression analysis, the result of this research indicated that banking profitability have a good performance based on CAMEL analysis.Findings: From the results of regression, the CAMEL analysis has a significant relationship to the bank profitabilityPractical Implications: The study demonstrated the use of CAMEL analysis to measure bank profitability. If bank performance declining through the CAMEL analysis so the Bank should make a decision to make a better performance changes of banking.Social Implications: This study was about the importance of camel analysis measuring the performance banking. CAMEL analysis detected the decrease in performance in any business sector.Originality/Value: This analysis adapted and adopted the study conducted by Sahut and Mili(2011), but this study focusedonly on the comparative performance between conventional and Islamic banking between Malaysia and Indonesia.Research Limitations/Implications: Comparison of CAMEL analysis focused on two countries between Malaysia and Indonesia (it also involves the comparative analysis of conventional and Islamic bank) to gain the profitabilityof banking, ROI with short period since 2010 until 2015

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