Non-Performing Loans and Net Interest Margin in the MENA Region: Linear and Non-Linear Analyses

Khalil Alnabulsi (), Emira Kozarević and Abdelaziz Hakimi
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Khalil Alnabulsi: Doctoral School of Regional- and Business Administration Sciences, Széchenyi István University, 9026 Győr, Hungary
Emira Kozarević: Faculty of Economics, University of Tuzla, 75000 Tuzla, Bosnia and Herzegovina
Abdelaziz Hakimi: V.P.N.C Lab, Faculty of Law, Economics and Management, University of Jendouba, Jendouba 8100, Tunisia

IJFS, 2023, vol. 11, issue 2, 1-17

Abstract: This paper analyzes the linear and non-linear relationship between non-performing loans and bank profitability measured by the Net Interest Margin for a sample of 74 Middle Eastern and North African banks over the period of 2005–2020. We used the System Generalized Method of Moments (SGMM) as a linear approach and the Panel Smooth Transition Regression (PSTR) model as a non-linear approach. The empirical results of the SGMM approach indicated that the ratio of NPLs negatively affects bank profitability. The findings of the non-linear relationship based on the PSTR model confirmed the existence of a threshold effect. We found that below the threshold of 4.42%, the effect of NPLs is negative but not significant, while after surpassing this threshold, the effect becomes negative and significant. As for bank specifics, we revealed that bank size is positively and significantly associated with bank profitability. For industry factors, we found that more bank concentration decreases bank profitability. Regarding the financial environment, we concluded that the global financial crisis exerted a negative impact on bank profitability. Moreover, we revealed a positive and significant impact of GDP on bank profitability as well as a negative impact of inflation on bank profitability. This study has some limitations regarding the social, economic, and financial differences of the whole sample, which includes banks from the Middle East and others from North Africa. Hence, decomposing the whole sample into two sub-samples could improve the results of this paper.

Keywords: credit risk; bank profitability; non-performing loans; system generalized method of moments; panel smooth transition regression; Middle East and North Africa (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2023
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