The Impact of Capital Adequacy and Non-Performing Loans on Loan Loss Provisions for Gulf Cooperation Council (GCC) Banks: Econometric Study Using Panel Data

Hala Fadheel Elfergani, Asma S. Abdelhamid Alzwi and Ali Zagoub

Chapter 10 in Handbook of Banking and Finance in the MENA Region, 2024, pp 245-286 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter examines the impact of capital adequacy ratios (CARs) and non-performing loans (NPLs) and the application of IFRS 9 on loan loss provisions (LLPs). It also analyzes the impact of LLPs and NPLs and the application of IFRS 9 on CARs for a sample of Gulf banks during the period 2012–2021. Panel data analysis was adopted to reach an appropriate model to study the effect of independent variables on dependent variables. The results of the study showed that most Gulf banks did not find statistically significant differences in the performance of the CAR and NPL indicators before and after applying IFRS 9. However, there were statistically significant differences in the performance of the LLP indicator before and after applying IFRS 9 in favor of applying IFRS 9 (after 2018). The study also found that there was a difference in the performance of the indicators. The study also found that there is a negative impact of CAR on LLP, and vice versa. On the other hand, the effect of NPL was positive on both CAR and LLP, while there was no effect of IFRS 9 adoption on both CAR and LLP. The importance of studying CAR and LLP is highlighted by the importance of financial solvency that may be affected after obligating banks to apply IFRS 9 in January 2018; therefore, the results of this experimental study can add to the limited knowledge about the behavior of CAR, LLP, and NPL before and after IFRS 9 adoption in developing countries. This chapter contributes to the limited literature on CAR, LLP, and NPL before and after IFRS 9 adoption in developing countries in general and GCC countries in particular. Reviewing previous literature, there was a scarcity of studies that examined the effect of CAR on LLP or the effect of LLP on CAR, as well as the effect of adopting IFRS 9 on both CAR and LLP in GCC banks. Very limited research has been conducted in developing countries in general. This is important taking into consideration the environmental factors in developing countries, which can give a different view on the issue of CAR, LLP, and the extent to which they are affected by the application of the IFRS 9 standard.

Keywords: MENA; Banking Sector; Business Risk; Corporate Governance; COVID-19; Cryptocurrency; Fintech; Financial Stability; Green Finance (search for similar items in EconPapers)
JEL-codes: F3 G2 G3 (search for similar items in EconPapers)
Date: 2024
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