Analysis of credit risk in the GCC banking sector: a dynamic panel data analysis

Purpose This study aims to investigate the determinants of nonperforming loans (NPLs) in the Gulf Cooperation Council (GCC) banking sector, emphasizing the impact of macroeconomic and bank-specific factors on credit risk. Design/methodology/approach Using a dynamic panel data analysis spanning from 2000 to 2018, the research uses various econometric models, including ordinary least squares (OLS), fixed effects and generalized method of moments (GMM), to assess the relationships between NPLs and their determinants across 44 conventional banks in the GCC region. Findings The findings reveal that non-oil real GDP growth and inflation rates significantly negatively influence NPLs, indicating that a robust economic environment enhances borrowers’ repayment capacities. Conversely, the Volatility Index (VIX) and bank inefficiency ratios exhibit a significant positive correlation with NPLs, highlighting increased credit risk during economic uncertainty and poor management practices. The study also identifies the adverse effects of the 2008 financial crisis on NPL levels, underscoring the need for effective risk management strategies. Practical implications The results suggest that bank managers should closely monitor macroeconomic indicators and adjust lending practices accordingly. Developing contingency plans and maintaining adequate capital reserves are essential for mitigating credit risk, particularly during economic downturns. Originality/value This research contributes to the limited literature on NPL determinants in the GCC banking sector by providing a comprehensive analysis that incorporates both macroeconomic and bank-specific factors, offering valuable insights for policymakers and banking professionals in managing credit risk effectively.