Determinants of Non-Performing Loans: Evidence from the Jordanian Banking Sector

Abstract

This paper investigates the determinants of non-performing loans in the Jordanian banking sector during the period 2008-2012. The study used macroeconomic and bank specific factors to identify the determinants of NPLs of Jordanian banks. Using panel data regression, our results report that among bank specific factors, the lagged NPLs and the ratio of loans total assets were the most important factors that affect nonperforming loans positively. However, contrary to international evidence our results show that large banks are not necessarily more effective in screening loan customers when compared to their smaller counterparts. With respect to the macroeconomic factors, we found that economic growth and inflation rate have a negative and significant effect on non-performing loans. In addition, we found that global financial crisis lead to higher non-performing loans in Jordan.