Determinants of Non-Performing Financing in GCC Islamic Banks: Evidence from Fixed-Effects and Panel Quantile Regression

This study examines the determinants of non-performing financing (NPF) in Islamic banks operating in the Gulf Cooperation Council (GCC) over the period 2014-2024. Motivated by the growing importance of asset quality for financial stability in Islamic banking systems, the analysis integrates macroeconomic conditions and global economic policy uncertainty within a structured panel econometric framework. The empirical strategy combines fixed-effects and random-effects estimators with panel quantile regression to capture both average and regime-dependent effects across the conditional NPF distribution. The Hausman test supports the fixed-effects specification, confirming the presence of correlated unobserved heterogeneity. Mean-based results indicate that bank size is the most robust determinant of NPF, while profitability and capital adequacy do not exhibit statistically significant average effects. Quantile regression reveals substantial heterogeneity: the effect of size strengthens markedly in higher NPF regimes, while liquidity becomes a significant stabilizing factor in the upper quantile. Economic growth reduces NPF in lower quantiles but loses explanatory power in high-distress states. Inflation and global policy uncertainty show limited statistical relevance. The findings suggest that financing distress in GCC Islamic banks is primarily driven by structural characteristics and liquidity conditions rather than profitability or capital strength alone. By adopting a distribution-sensitive approach, the study contributes nuanced evidence to the Islamic banking and financial stability literature and offers implications for risk-based supervisory frameworks.