The Effect of CAMEL Model on Loan Portfolio Quality of the Haitian Banking Sector

Abstract

This paper examines the impact of CAMEL approach on Non-Performing Loans (NPLs) of the banking sector in Haiti, using monthly data from October 2019 to April 2023. The statistical analysis is carried out using the Auto-Regressive Distributed Lagged (ARDL)-Error Correction Model (ECM) approach. The results confirm the “moral hazard” hypothesis that low-capi - talization of banks implies deterioration of loan portfolio quality. Similarly, the findings support the “bad management II” hypothesis that past earnings are negatively associated with increases in problem loans. Banks’ liquidly at times t and t − 1 has a positive and significant effect on NPLs, while at time t − 4 banks’ liquidity is negatively and significantly correlated with NPLs. In contrast, management efficiency has no influence on NPLs. Regarding the control variable of the study, the exchange rate, at time t , it is positively and significantly related to NPLs, supporting the “ exchange rate” hypothesis that an increase in exchange rate leads to problem loans. Though, the findings show a significant and negative effect of exchange rate on NPLs at time t − 4. In addition, the CUSUM and CUSUMSQ statistics are well within the 5% critical bounds, implying that short and long-term coefficients in the ARDL-ECM are stable. Lastly, our findings highlight the importance of taking into account CAMEL variables and macroeconomic variables like the exchange rate when assessing the loan portfolio quality of Haitian banks from a financial stability perspective.