The impact of credit concentration and capital adequacy on non-performing loan levels: an econometric study of a sample of Iraqi commercial banks for the period "(2015-2024)

Abstract

The problem addressed by this study lies in the increasing rates of non-performing loans (NPLs) in the banking sector due to limited capital buffers and unclear credit policies. Therefore, the study aimed to measure the role of credit concentration and capital adequacy ratio in loan defaults at the banks in the study sample, while controlling for variables such as size, profitability, liquidity, and inflation. The study employed a descriptive-analytical approach, utilizing panel data from a sample of six commercial banks for the period 2015-2024, comprising 60 observations. The Herfindahl and Hirschman Indices (HHIs) were used to measure credit concentration, and the data were analyzed using a standardized fixed-effects model.

The results showed a significant positive correlation between credit concentration and an increase in NPLs at the 1% level, demonstrating that weak credit diversification increases financial vulnerability. Conversely, the study revealed a significant negative correlation between capital adequacy and profitability in reducing NPLs. The study recommended that banks diversify their loan portfolios to mitigate concentration risks and enhance capital adequacy to absorb unexpected credit shocks.