Impact of oil and gas price shocks on the non-performing loans of banks in an oil and gas-rich economy

Abstract

Purpose -The purpose of this paper is to examine and compare the impact of oil and gas prices shocks on the non-performing loans (NPLs) of banks at the aggregate as well as at the level of commercial and Islamic banks in Qatar over the period 2000-2016. Design/methodology/approach -Using the West Texas Intermediate Database, BankScope Database, World Bank's World Development Indicators Database, and International Monetary Fund Database, the authors use a one-step system generalized method of moments dynamic model to examine and compare the association between oil and gas prices shocks with NPLs in Qatari banks. The authors also test the hypotheses of direct and indirect impacts of oil price shocks and gas price shocks on bank NPLs. Findings -The results indicate that oil price shocks and gas price shocks do not have directly affect NPLs of Qatari banks at the aggregate level, while they have indirect effects that are channeled through the country-specific macroeconomic and institutional factors. The authors find that oil and gas prices shocks affect NPLs of Qatari Islamic banks directly through extended oil and gas-related cash flows, while their impact on the NPLs of Qatari commercial banks is indirect. In other words, Islamic banks in Qatar greatly benefits from increased cash flow caused by the rise in the oil and gas prices, which make their NPLs, much lower than that in commercial banks. Better capital cushion, better managerial efficiency, better risk management, and liquidity management systems should be used by the Islamic banks in Qatar to expand their customer base. The authors also find that positive fiscal stance of the government reduces the NPLs in both commercial and Islamic banks. Practical implications -The results of this study necessitate policy measures that can counter the effects of changes in oil and gas prices on the growth of bank NPLs. Originality/value -It is widely recognized that oil and gas prices and the level of production are of great importance to the economic development of oil and gas-exporting countries. So far, however, no econometric study has been reported in the literature which analyses and compares the impact of oil and gas prices shocks on the NPLs of commercial and Islamic banks and also at the aggregate level in any of the oil economies. Thus, this study provides the first empirical evidence on distinct direct and indirect channels through which oil and gas prices shocks may affect bank NPLs.

Do oil and gas price shocks have an impact on bank performance?

“…β 0 is a constant term; OIL is the oil price shocks indicators; GAS is the natural gas price shocks indicators; BAN is the bank-specific factors; MAC is the macro-economic variables; FIN is the financial structure indicators; and ε is the error term. Saif-Alyousfi (2019), Saif-Alyousfi et al (2018a, 2018b, 2018c, and Poghosyan and Hesse (2016) argue that study of bank performance determinants may suffer from endogeneity bias, omitted variables and the strong persistence of bank profit. They argue that the persistent profit reflects the barriers to market competition and sensitivity of the information to macroeconomic collapse, which is serially related.…”

“…They find oil prices have a significant impact on bank capitalization, management efficiency, earning power, and liquidity. Al-khazali and Mirzaei (2017) and Saif-Alyousfi et al (2018a) find that oil price movements have a significant effect on the level of non-performing loans of banks in oilexporting nations. Khandelwal et al (2016) investigate the relationship between world oil price fluctuations and financial developments in the GCC countries.…”

“…Although the gas sector still plays a significant role in the economic growth of the Arab region, these authors did not consider the effect of gas price shocks on bank profitability. For example, at the time of the global financial crisis of 2008 Qatargas had seven LNG megatrains, of which four are the largest in the world, each with a production capacity of 7.8 MTA, accounting for almost 38% of the overall GDP of Qatar (Saif-Alyousfi et al, 2018a, 2018b. However, Poghosyan and Hesse's study period did not go beyond the global financial crisis, which includes the period of political instability witnessed in the region due to the Arab Spring revolution and the Yemen War.…”

“…As GCC countries are key members of OPEC (Kontaxis, 2016) we have used both WTI and Brent as reference oil price parameters to check the robustness of our results: Brent as an alternative to WTI has a similar effect on the growth of bank performance in oilexporting countries. For gas prices, we use natural gas prices in line with Saif-Alyousfi et al (2018a, 2018b.…”

The Effect of Financial Leverage on The Islamic Banks’s Performance in The Gulf Cooperation Council (GCC) Countries

“…These Islamic banks constitute an important source of financial intermediation, controlling on average 24 percent of the region's banking system assets (Al- Hassan, Khamis, & Oulidi, 2010). However, the majority of the prior studies in GCC countries have not examined the effect of the financial leverage on the Islamic bank's performance (Poghosyan and Hesse, 2009;Mirzaei and Moore, 2016;Ashraf, Ramady, & Albinali, 2016;Saif-Alyousfi, 2019;Saif-alyousfi, Md-Rus, & Mohd, 2018;Saif-Alyousfi, Saha, & Md-Rus, 2017a, 2017b, 2018b, 2018c, 2018a. Hence, this study aims at filling this gap by examining the effect of the financial leverage on the performance of the Islamic banks' performance during the period from 2005 to 2017.…”