Legal Origins, Governance and Bank Lending

Abstract

This article investigates if legal origins and governance impact lending by banks in a large sample of low- and middle-income countries for 2004 to 2017. The results revealed that countries with British legal origin, the strength of the legal systems, the rule of law, and regulatory quality are positively and statistically significantly correlated with the credit provided by the banks, among other factors. The estimations based on data for the post-global financial crisis revealed that in countries with British legal origin, the rule of law and regulatory quality mattered intensely in the banking sector’s credit. The results imply that the developing countries should continue to sustain and improve their good governance practices and improve on contract enforcements to allow maximum leverage practices of good governance that can positively influence credit diffusion by the banks.