The impact of foreign direct investment inflows on nonperforming loans: the case of UAE

Peterson K Ozili,Asma Salman,Qaisar Ali

doi:10.21511/imfi.17(4).2020.22

Abstract

The banking sector is at risk of worsening loan quality, which is a major threat to the financial system’s stability. The impact of foreign direct investment (FDI) inflows on nonperforming loans (NPLs) in the United Arab Emirates (UAE) is empirically investigated in this study. The data from 2008 to 2017 are collected and analyzed through the ordinary least squares (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 and contribute to the literature to establish a relationship between FDI inflows and NPLs by examining the relationship between FDI inflows and NPLs in the context of banks in the UAE.

Highlights

The observed negative relation- is in parallel with theory and suggests that nonperforming loans (NPLs) ship between foreign direct investment (FDI) inflows and NPLs supports H2, in banks will lower banks’ interest income as borbut the FDI coefficient is statistically insignificant rowers’ default in the payment of principal or inin columns 1 and 2, which implies that FDI in- terest on loans
This study investigated the impact of FDI inflows on bank NPLs in the United Arab Emirates (UAE) while controlling for relevant NPL determinants
The findings confirm that, FDI inflows did not directly and significantly impact NPLs, FDI inflows reduced the size of NPLs during the economic crisis

Summary

INTRODUCTION

Louzis et al (2012), using dynam- banks’ size, and credit orientation impact NPLs. ic panel data, analyzed the rudiments of NPLs for Buncic and Melecky (2012) investigate the correlathe Greek banks and finds that macroeconom- tion between macroeconomic variables and NPLs ic factors such as GDP, unemployment, interest for 54 countries and find that real GDP growth, rate, and management quality were significant inflation, and interest rates, fluctuations in the determinants of NPLs. Whereas, real GDP growth and the domestic stock analyze the correlation between macroeconomprice index had a negative impact on NPLs. Ebeke ic variables and NPLs in the US banking system and Loko (2014) investigate the impact of remit- from 1985 to 2010 and find that per capita GDP, tances on NPLs for 141 developing countries from inflation rate, and cumulative loans significantly.

METHODOLOGY

Model specification

Impact of FDI inflows on NPLs

Alternative measure of FDI

Robustness

CONCLUSION