Abstract
The purpose of this study is to analyze the effect of five indicators of credit risk on four financial stability measures under the title of return on assets, return on equity, Z-Score of ROA, and ROE. While economic growth, inflation and financial sector development are added as control variables. Based on the sample of top 20 banks in GCC, regression models are developed for the financial stability, credit risk indicators and control variables. It is observed that NPLs (credit risk indicator) to gross advances is significantly impacting on all stability measures. While, the impact of non-performing loans to equity ratio on stability is also significant for the whole sample. Under first sub sample of top 10 banks, both non-performing loans to gross advances and provision against NPLs are significant determinants to create instability in the banks. Besides, effect of NPLs to equity ratio is found to be negatively significant for both ROA and ROE under 2nd sub sample of the study. The effect of financial sector development is positively significant for the banking sector stability in both full and sub samples. Contribution of the study can be viewed from both theoretical and practical context as it is a very first attempt to consider credit risk indicators, stability measures, financial sector development and economic growth for Gulf states. Core limitations covers the limited sample size and focus on the present decade which can be reconsidered with better sampling and adding the time duration of last decade as well.