The Relationship between Non-Performing Loans and the Performance of Commercial Banks Listed on Bahrain Stock Exchange: Empirical Study

Authors

Wafa Ahmed AlRowaiei, College of Administrative Sciences, Applied Science University, East Al-Ekir, Kingdom of Bahrain.Follow
Mohammad Salem Oudat, College of Administrative Sciences, Applied Science University, East Al-Ekir, Kingdom of Bahrain.Follow
Basel J. A. Ali, College of Administrative Sciences, Applied Science University, East Al-Ekir, Kingdom of Bahrain.Follow

Abstract

The present paper aims to examine the relationship between non-performing loans and the performance of commercial banks listed on the Bahrain Stock Exchange. To achieve the objectives of the study, non-performing loans, market value, operating costs, capital adequacy, and cash reserve represented the independent variables and the return on equity was used to measure the dependent variable (financial performance). A set of diagnostic tests were performed to ensure the appropriateness of the data for the regression analysis used. In addition, the Breusch- Pagan Test was used to measure the homogeneity of the contrast, the W?lderj-Godfrey test was used to measure the self-correlation of the remaining residues (Autocorrelations) and the Tests for normality were used to ensure the normal distribution of residues. The Pooled OLS data collection method was chosen. The analyzed financial data were extracted from the annual financial reports of the 7 sampled commercial banks from 2014 to 2018. The results showed a statistically significant relationship between non-performing loans and the financial performance of commercial banks, in particular. Furthermore, there was a negative relationship between non-performing loans and financial performance, whether it is return on equity or return on assets. Moreover, for operational costs, capital adequacy and cash reserves had a positive relationship with financial performance for both models. Meanwhile, only market value had a negative relationship with return on equity, but it had a positive relationship with return on assets. The study recommends that commercial banks management should evaluate clients and grant loans based on their credit efficiency as well as review the granting loans procedures. Furthermore, the administration of commercial banks should continuously attempt to improve the operational efficiency by maximizing the production of inputs ratio to obtain the greatest outputs.

Recommended Citation

Ahmed AlRowaiei, Wafa; Salem Oudat, Mohammad; and J. A. Ali, Basel (2021) "The Relationship between Non-Performing Loans and the Performance of Commercial Banks Listed on Bahrain Stock Exchange: Empirical Study," Information Sciences Letters: Vol. 10 : Iss. 4 , PP -.
Available at: https://digitalcommons.aaru.edu.jo/isl/vol10/iss4/4