National Governance and Non-Performing Loans (NPLs) in the Arab Banking Sector: A Comparative Econometric Study

Abstract

This study tries to measure and analyze the impact of +- on non-performing loans (NPLs) in the banking sector, while also examining the extent to which governance indicators can explain changes in the quality of banking assets. To achieve this objective, the study employed the Panel EGLS model with robust standard error corrections (White cross-section), using annual panel data from a sample of 13 Arabic countries during the period 2002–2021.The results demonstrated a statistically significant inverse relationship between governance quality and the NPL ratio, indicating that improved governance contributes to reducing credit risk and enhancing the quality of banking assets. The study also revealed a disparity in governance levels between oil-producing and non-oil-producing countries, with oil-producing countries showing a relative advantage. However, no significant differences were found in NPLs between the two groups or across the time periods (before/after 2011). The results confirmed that the impact of governance is cumulative and institutional in nature, with long-term effects. Accordingly, the study recommends improving state governance frameworks by strengthening the rule of law and contract enforcement, combating corruption and conflicts of interest, raising the effectiveness of government institutions, improving the quality of regulatory frameworks, enhancing transparency and accountability, and reducing political interference, thereby contributing to improving the institutional environment of the banking sector, reducing credit risks, and limiting the accumulation of non-performing loans.