How does total quality management influence the loan quality of the bank?

Abstract

This paper aims to investigate whether, and to what extent, total quality management (TQM) influences bank loan quality. We propose an approach to measure TQM for evaluating this relationship. The proposed measure is the residual from the Fama–MacBeth regression based on bank efficiency proxied by the income-to-cost ratio. Our proposed TQM measure is statistically significant. We obtain data of 581 US commercial banks from the SNL Financial database for the period 1991–2013 with a total of 13,303 bank-year observations. The result shows that TQM is positively related to bank loan quality. This suggests that the implementation of better TQM can help management to monitor borrowers, improve competition and efficiency, manage good-quality loan portfolios, minimise expenses, and generate more revenues. This research has several implications for regulation, TQM implementation, and policy for the banking industry. In sum, an association between TQM and loan quality allows us to expand our knowledge of the specific role of TQM in bank performance, management decision, and managing loan portfolios.

Keywords:

• total quality management
• bank efficiency
• loan quality
• bank performance
• loan portfolios
• managerial ability

Acknowledgements

The authors would like to thank Dr Chan Sok Gee, Dr Wan Marhaini Binti Wan Ahmad, Dr Izlin Binti Ismail, Dr Fauzi Bin Zainir, Mr Sohel Rana, Mr Aslam Mia, Mr Abu Hanifa Noman Bin Alam, and the anonymous reviewers for their critical review and precious comments that helped improve the manuscript substantially.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Hasanul Banna http://orcid.org/0000-0002-6902-8525

Additional information

Funding

The first author would like to thank University of Malaya for funding his doctoral studies through Bright Spark Program (BSP).