Analyzing microeconomic determinants of non-performing loans in Saudi Arabian banks: Implications for banking sector health and risk management

Abstract

This research aims to study the smaller economic factors that influence the percentage of loans that banks in Saudi Arabia have given out but are not getting repaid. It uses data from 10 Saudi Arabian banks, covering 130 instances from the years 2009 to 2021, to figure out which economic factors at the bank level matter most. These factors are taken from the banks' yearly financial statements. The study looks at five specific factors suggested by earlier research, which are believed to impact the percentage of these non-repaying loans in the banking sector. These factors are the ratio of loans to deposits, the capital adequacy ratio (CAR), the return on assets (ROA), the net interest margin (NIM), and the size of the bank. The findings reveal that the size of the bank, its CAR, its ROA, its ratio of loans to deposits (which has a reverse effect), and its NIM (which has a direct effect) all play significant roles in determining the percentage of non-repaying loans in Saudi Arabian banks. Understanding these factors is crucial for getting insights into the health of the banking system. Monitoring and evaluating the ratio of non-repaying loans is important for keeping the financial system healthy and supporting steady economic growth. The study suggests that to manage the risks of loans not being repaid and to keep the banking system stable, effective policies and risk management practices are needed. It advises that banks improve their lending processes to manage non-repaying loans better and ensure profits for their shareholders.