Do the macro and global economic factors drive the nonperforming loans in GCC economies?

Abstract

Purpose

The current study aims to investigate the determinants of nonperforming loans (NPLs) in the GCC economies during the period spanning 2000 to 2018. It also examines whether the worldwide financial crisis of 2007–2008, which brought the issue of non–performing loans to the greater attention of academics and policymakers, had a substantial impact on NPLs in this region.

Design/methodology/approach

The sample consists of 53 conventional banks from GCC countries, and the basic data for the study is obtained from various sources such as Bankscope, IMF World Economic Outlook, World Bank and Chicago Board of Options Exchange Market Volatility Index. The estimations were done by dynamic panel data regression modeling using system generalized methods of moments.

Findings

The findings reveal that both, the non-oil real GDP growth rate and inflation have favorable effects on NPLs. On the other hand, domestic credit to the private sector and the volatility index have an adverse effect on NPLs. Furthermore, the period-wise analysis shows that the relevance and significance of the determinants of NPLs vary between the precrisis and postcrisis periods. It is also reflected through the intercept dummy, which is found to be significant, indicating that the financial crisis, as a global economic factor, had a significant impact on NPLs. A number of robustness tests are applied, which indicate that the results are mostly robust and consistent in terms of the significance of the explanatory variables and the direction of their relationship with the dependent variable.

Practical implications

Policymakers and bank authorities must strive to maintain a healthy economy and implement macroprudential policies to improve the financial stability of banks and reduce credit risk.

Originality/value

To the best of the authors’ knowledge, this is likely the first study that empirically investigates the influence of the financial crisis on NPLs in the context of GCC economies. In addition, the research spans 19 years to produce more conclusive results.

Citation

Kumar, M., Al-Romaihi, M.A. and Aktan, B. (2023), "Do the macro and global economic factors drive the nonperforming loans in GCC economies?", Journal of Financial Economic Policy, Vol. 15 No. 3, pp. 190-207. https://doi.org/10.1108/JFEP-12-2022-0290