Capital requirements, institutional quality and credit crunch in the MENA region
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 26 January 2021
Issue publication date: 24 November 2022
Abstract
Purpose
The introduction of Basel capital adequacy standards (I, II and III) has provoked a large body of empirical and theoretical literature that aimed to detect the consequences of risk-based capital rules on bank lending behaviour and credit availability (and the possible emergence of the credit crunch phenomenon), and came up with divergent conclusions. This study aims at participating in this continuous debate but detecting the applicability of the credit crunch theory in the MENA region, taking into consideration the impact of the institutional environment, which may play a role in mitigating the supply-side credit crunch.
Design/methodology/approach
This study exploits the Fixed Effects method on a dataset of 210 banks from 14 MENA countries over the period 1999–2016. The paper exploits the percentage change in bank credit as a dependent variable, capital requirements and three institutional quality variables as explanatory variables, in addition to a set of micro- and macro-economic variables.
Findings
The study finds that the implementation of higher capitalisation ratios does participate in a significant decline in bank credit supply. Additionally, by testing the impact of institutional factors on bank lending, it reveals that good governance and political stability encourage banks to extend credit and soften the credit crunch, while higher level of financial freedom discourages banks from expanding loan supply and even magnifies the decline of credit following tightening capital requirements.
Practical implications
This paper provides very important insight for MENA policymakers and bank regulators by highlighting the importance of the institutional environment factors in amplifying or softening the effect of higher capital requirements in their economies.
Originality/value
In addition to examining an understudied sample of countries, this paper's originality and value added are represented mainly by testing the impact of institutional environment and governance level on bank lending behaviour.
Keywords
Citation
Awdeh, A. and EL-Moussawi, C. (2022), "Capital requirements, institutional quality and credit crunch in the MENA region", International Journal of Emerging Markets, Vol. 17 No. 8, pp. 1909-1925. https://doi.org/10.1108/IJOEM-05-2020-0527
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited