Stability and insolvency sensitivity to Tunisian bank specific and macroeconomic effects

Abstract

Purpose

The purpose of this study to investigate the sensitivity of stability and insolvency of the Tunisian financial banking with respect to banks’ specific factors as well as to the macroeconomic conditions (including gross domestic product growth, inflation rate, foreign direct investment [FDI], EXRate, INT and unemp) during 2005–2014 period covering 2011 Tunisian revolution.

Design/methodology/approach

The variables of interest the financial institution stability which is measured by Z-score and solvency indicators that are determined by the capital adequacy ratio (CAP) and deposits to assets (DTA). This study seeks to assess the linkages among them (causality, magnitude and duration) that may shed some light on the micro-financial vulnerabilities that are associated with the macroeconomic environment and the monetary authority policy. To do so, this study considers two models: a panel vector autoregressif-X model for the tri-variate vector (Z-score, DTA, CAP) estimated by a system generalized method of moments after a forward mean-differencing and a dynamic seemingly unrelated regression model for the bi-variate vector (Z-score, DTA) estimated by 3LS.

Findings

Results say that there is a uni-directional contemporaneous negative relationship from stability to insolvency. Stability evolution can be attributed to both macroeconomic conditions and banks’ specific factors, whereas insolvency is attributed only to banks’ specific factors. Stability was found to increase when growth rate and FDI rise, whereas instability increases when interest rate rises, exchange rate depreciates and if inflation is high. Stability increases also when CAP increases. However, compared to conventional banks (CBs), Islamic banks (IBs) are found to be more solvent than CBs, and more stable post 2011 Tunisian revolution.

Practical implications

As fluctuation in inflation and exchange rate could lead to high interest rates and hence decreases the stability of the financial sectors, Tunisian monetary authority is advised to practice low interest rate policy.

Originality/value

This paper attends not only to compare the response of stability and insolvency to the effect of exogenous variables (macroeconomic and financial factors) in Tunisian banks but also to detect short run and long run feedback effects between dependent variables as well as to investigate whether IBs and CBs present evident heterogeneity of stability and insolvency evolution in relation to 2011 Tunisian revolution.

Citation

Neifar, M. and Gharbi, L. (2023), "Stability and insolvency sensitivity to Tunisian bank specific and macroeconomic effects", Journal of Islamic Accounting and Business Research, Vol. 14 No. 2, pp. 339-359. https://doi.org/10.1108/JIABR-08-2021-0236