The Impact of Foreign Direct Investment Inflows on Nonperforming Loans: The Case of UAE

Abstract

Banking sector is at a risk of worsening loan quality which is a major threat to the stability of financial system. The impact of foreign direct investment (FDI) inflows on nonperforming loans (NPLs) in United Arab Emirates (UAE) is empirically investigated in this study. The data from 2008 to 2017 is collected and analysed through ordinary least square (OLS) technique. The findings reveal that FDI inflows reduced the size of NPLs during the economic crisis. Also, the combined effect of higher FDI inflows and bank efficiency reduced the size of NPLs for banks while the combined effect of FDI inflows and better institutions, such as strong regulatory quality, did not reduce the size of NPLs but rather increased the size of NPLs. The findings have implications. The findings contribute to the literature to establish a link between FDI inflows and NPLs by examining the link between FDI inflows and NPLs in the context of banks in the UAE.