The Impact of COVID-19 on Credit Risk: An Assessment in Malaysian Banking System

Abstract

The unprecedented COVID-19 pandemic around the world is one of the shocking events in this decade. It has affected the financial institution in particular and banking institutions worldwide. Policymakers are getting worried due to the continuous increases in credit risk, and the situation is expected to worsen in the era of COVID-19 pandemic. The COVID-19 pandemic is said to be no difference with financial crisis. It affects the banking system and the commercial banks throughout the world has suffered a steady increase in the credit risk. Therefore, this paper tries to assess the the impact of COVID-19 on credit risk in Malaysian banking system. Two models were developed to test for the impact of COVID-19 pandemic. Model 1 was developed to present COVID-19 pandemic as the sole impact on the credit risk while Model 2 included the interaction between the economic performance and COVID-19. Johansen cointegration method was utilized in this study. The quarterly data spanning from 2013 to 2020 were tested. Finding revealed that COVID-19 pandemic influence the credit risk in the long run equilibrium through the interaction of economic performance. This implies that the failure of payback the loans during the COVID-19 pandemic together with the lower economic performance may constraint the bank’s ability to lend to other borrower thus causes the to experience the rising outstanding loans and create problems in banking the system. This can harm the entire banking institution and the economic conditions as a whole.