Determinants of Non-Performing Loans: evidence from Cyprus Banking System

Abstract

The present study tries to detect the factors that increase the likelihood of non-performing loans for a sample of 878 loans in Cyprus for the period of 2004-2020. The variables used are specific variables to the loan and macroeconomic variables. The loan-specific variables included the interest rate, loan duration, sector of the loan, remaining balance, and whether the loan has been restructured while the unemployment rate was the only macroeconomic variable. After the application of the method of probit with panel data, the findings suggest that the non-performing loans vary positively with loan remaining balance and negatively with the loan duration, whether the loan has been restructured, and, unexpectedly, interest rates. Finally, evidence suggests that the quaternary sector has a positive relationship with non-performing loans, while primary, secondary, and tertiary sectors have a negative relationship.