Causes of Non-Performing Loans: The Experience of Gulf Cooperation Council Countries

Abstract

As financial intermediaries and provider of financial services, banking sector plays a pivotal role in the development of any economy. Performance of loans in banks’ portfolios is a critical issue for this sector. The purpose of this study is to examine the determinants of Non-Performing Loans in Gulf Cooperation Council region. This study investigates the significant factors determining the Non-Performing Loans in banking sector of this region taking into consideration bank specific as well as macroeconomic factors. Two step Generalized Method of Moments approach to study the relationship among the variables was used to examine the determinants of Non-Performing Loans in this region for a period from 2009 to 2015. Four different models employed as a result of the examination of the theories were used to observe and analyse the determinants of these non-performing loans. According to the findings of the model generated from the bad management hypothesis, Non-performing loans are a serious issue requiring due attention, and bank profitability measured by Return on Average Assets has significant and negative effect on Non-Performing Loans. This suggests that banks in this region have more incentive to increase return by using their assets and effectively managing the funds contributed by the shareholders respectively.

Keywords: Non-Performing Loans, GCC Banking Sector, Financial Stability

JEL Classification: G21, E44