Understanding GCC Banks: Credit risk, Interest Charges, and Operating efficiency

Abstract

This study empirically examines two research questions: First, whether the Credit Risk increases the operating efficiency of banks? And second, whether Interest Charges Influences the relationship between Credit Risk and Operating Efficiency? This study uses the secondary data and it is drawn from EIKON DataStream for the period 2005 to 2022. The sample size of the study includes 50 banks of the GCC region, covering eight states, which includes: Abu Dhabi, Dubai, Saudi Arabia, Sharjah, Kuwait, Oman, Qatar and UAE. For addressing the research questions raised in this study, we employ different regression techniques that include the fixed effects (FE) model and System dynamic panel-data estimation test to ensure robustness of the results. Our results show that high interest rates benefit the 25th and 75th percentiles, but the firm's ability to adapt, innovate, and restructure in response to the changing financial environment will determine how much they benefit lower efficiency quantiles. Banks that overcome these challenges may become more competitive, efficient, and streamlined. While higher interest rates increase financing costs and financial constraints for lower- efficiency banks, they can also spur good transformation.