Determinants of the Non-Performing Loans in the Arab Banking Sector : Evidence from Dynamic Panel Data Models

The weakness of the risk management system and the financial or economic crises may make the banking sector exposed to high credit risks, which may lead to high levels of default. Furthermore, the high level of debt burden ratio may make customers unable to pay their financial obligations, thus increasing credit risks. The current study is in line with this and aims to examine the determinants of the non-performing loans (NPLs) in the Arab banking sector. To that effect, we consider internal factors that include bank-specific variables, and external factors that involve industry-specific and macroeconomic variables. We estimate a dynamic panel data model by the system Generalized Method of Moments (GMM) for a set of 15 Arab economies based on annual data covering the period from 2013 to 2019. The obtained findings outline the importance of bank-specific factors in explaining the NPLs ratio. In fact, there are significant and positive linkages between the one-period lagged NPLs ratio, the size of the banks, and the capital adequacy ratio on the one hand, and the NPLs ratio on the other hand, and significant and negative linkages between the return on assets (ROA) and the NPLs ratio. The study also indicates that the NPLs ratio reacts significantly and negatively to fluctuations in economic growth. It is also found that the growth of the gross loan, the interbank interest rate, the credit information industry, and the inflation rate do not exert any effects on the NPLs ratio.The study provides important recommendations for bank decision-makers in the Arab region. Indeed, they should work on improving the operational efficiency and enhancing credit risk management and risk management in the banking sector, developing the operational framework for the monetary policy of central banks, enhancing the opportunities to benefit from the credit information industry, boosting the government's role in adopting economic policies that support investment, developing stress tests for banks, and adopting early warning systems