Bank regulation and credit crunch: evidence from MENA region commercial banks

Abstract

Purpose

This paper focuses on the relationship between the regulatory capital requirements and the supply of credit for commercial banks that are operating in the MENA region from 1999 till 2017.

Design/methodology/approach

The application of the Fixed Effects Model on a panel of commercial banks in the MENA region has shown a negative relationship between supply of credit and both the capital requirements and solvency ratios.

Findings

The results showed that the idiosyncratic, the macroeconomic and the institutional variables affect the supply of credit behavior of banks. The robustness tests using the Two-Stage Least Square method (2SLS) also led to a negative correlation between the growth of credit and capital requirements. Specific macroeconomic and institutional variables have revealed the expected sign and are significant regardless of the estimated specifications.

Research limitations/implications

This work can be subjected to further future extensions. The explanatory power of our model can be improved by incorporating variables that reflect the corporate governance and structure of banking sector. Similarly, we can also include a variable that takes into account the increasing competition that could affect the stability of the banking sector and therefore the prudential banking regulation.

Originality/value

Previous studies that investigated only the relationship between capital level and risk-taking behavior of banks in the MENA region did not take into account neither the economic and institutional environment nor the impact of these regulations on credit (loans) supply.

Citation

EL-Moussawi, C., Kassem, M. and Roussel, J. (2023), "Bank regulation and credit crunch: evidence from MENA region commercial banks", International Journal of Emerging Markets, Vol. 18 No. 5, pp. 1236-1253. https://doi.org/10.1108/IJOEM-12-2019-1090