The problem of non-performing loans in Iraqi banks: An econometric study of the impact of economic and institutional factors on asset quality

Abstract

The problem of non-performing loans in Iraq is worsening day-by-day and remains a continuous threat to the stability of the banking sector. The global economy site reports that Iraq was the frontrunner in Asia in terms of non-performing loans size in 2022. In light of this situation, the intent of the study was to examine both macroeconomic factors captured by gross domestic product, interest rates, inflation and oil revenues as well as institution factors captured by capital adequacy, liquidity, and profitability as key determinants causing the problem of the non-performing loans utilizing the multiple linear regression method applied to quarterly data. The results showed that inflation, interest rates and gross domestic product decreases asset quality, as well as increases credit risk, which is something quite unique to the Iraqi economy especially the positive relationship specifically between GDP and non-performing loans. In terms of oil revenues, their growth during periods of economic growth reduces non-performing loans, showing once again the importance of the oil sector. The study further concluded that capital adequacy resulted in a higher level of non-performing loans and did not find any statistically significant effect as it relates to the other institutional variables tested. This paper provides an important perspective for policymakers, especially the rector of the Central Bank of Iraq, on the need to create a sustainable plan and solutions to improve the banking system’s capacity to cope with credit risks and fulfil its role to the economic development agenda.