The Impact of Oil Price Movements on Bank Non-Performing Loans (NPLs): The Case of Iran

Document Type: Original Article

Authors

1 Ph.D Student, Management and Economy Faculty, Islamic Azad University, Science and Research Branch, Tehran, Iran.

2 Professor, Management and Economy Faculty, Islamic Azad University, Science and Research Branch, Tehran, Iran.

3 Assistant Professor, Economic Department, Allameh Tabataba'i University, Tehran, Iran

4 Assistant Professor, Economy Faculty, Islamic Azad University, Science and Research Branch, Tehran, Iran.

Abstract

It is generally believed that macroeconomic and financial performance in oil exporting countries is interlinked to oil price movements. Regarding that assumption, the present study aims to examine the impact of oil price movements on bank nonperforming loans (NPLs) ,as a criterion for evaluation of bank credit risk, by applying the Generalized Method of Moments (GMM) on data from 18 Iranian banks data over period 2006–2017. The result of the estimated model indicates that there is a significant relation between fluctuations of oil price and bank nonperforming loans; accordingly, any decrease in the price of oil will result in an increase in bank nonperforming loans. Also, in order to have comprehensive assessment, economic and bank specific control variables were used in the model. Findings show that the NPLs ratio increases as economic growth decreases and exchange rate and real interest rates rise. Among bank specific factors, equity ratio as a criterion for efficiency and loan growth has a negative effect on NPLs, but by raising bank industry concentration, credit risk and financial stability can be threatened. Thus, the reliance of oil rich economies on oil incomes leads to the linkage of oil prices, and macroeconomic and financial performance. Therefore, the result of this study will be useful in adapting and diversifying macroeconomic policies in the face of drastic changes in oil prices and mitigating its adverse effects.

Keywords