The Impact of Capital, Corruption, and Institutional Factors on the Stability of MENA Region Banks

Abstract

ABSTRACT:The stability of commercial banks operating in the MENA region is still questionable even though they have faced a drastic favorable change after 2008. Most of bank's regulatory capital are controlled by corrupted governmental officials which led banks in this region to increase their risk-taking behavior at the expense of stability. This paper examines the impact of regulatory capital, economic, institutional, and political factors on the stability of commercial banks that are operating in the MENA region. The data employed in this study is a pooled cross-section and time series data of 13 banking system in the MENA region: Lebanon, Saudi Arabia, Qatar, Kuwait, Jordan, United Arab Emirates, Tunisia, Bahrain, Oman, Morocco, Egypt, Israel, and Turkey covering the period of 2000 to 2017. A dynamic Generalized-Method-of-Moments (GMM) estimator was adopted and a two-stage least squares (2SLS) regression method was conducted to check for robustness. Relying on the results of Hausman test, a fixed effects model was used. The following variables have shown a significant and positive relationship with bank stability; the equity (CAP), the profitability (ROA), the growth (ΔGDP), and the dummy Basel II (BAS2) variables. The positive impact of both capital and Basel II requirements on bank stability supports the regulatory hypothesis. Conversely, non-performing loans and bank's size negatively affected the stability of the banking sector. Regarding the institutional factors, the quality of governmental regulations and political stability have shown a positive relationship with bank's stability while the other variables (corruption, establishing new prudential rules, and freedom in speech) failed to show a significant relationship. The findings of this paper confirmed the progression of the additional capital requirements for MENA region banks. Moreover, a close supervision should be applied on large banks that might have the tendency to increase their risk-taking behavior to overcome the cost of the additional required capital. In additional, our findings verified that economic growth and operating environment play a crucial role on the stability of the banking sector. Finally, the results confirm that institutional-linked factors are more important than country-related regulations in enhancing bank's stability due to the presence of a well-designed Basel framework.