Financial Stability in the MENA Region: The Impact of Banking Capitalization and Institutional Environment on Credit Availability

Abstract

This study aims to analyze the applicability of the supply-side credit crunch in the MENA region by investigating the influence of bank capitalization and the institutional environment on the lending activities of banks operating in the region from 1999 to 2020. Employing the generalized method of moments (GMM) panel data estimator, our analysis reveals that bank lending is shaped by specific bank-related variables, country-level macroeconomic variables, and the quality of institutions. Our findings underscore that increases in bank capitalization levels, competition levels, or banks' liquidity ratios exert a negative impact on credit availability. Conversely, the size and profitability of banks have a positive effect on the accessibility of loans. It is evident that the banks under consideration consistently expand their credit supply in tandem with economic expansion and low inflation rates, thereby positively influencing credit demand. Furthermore, our study indicates that robust anti-corruption measures, political stability, and adherence to the rule of law act as catalysts, encouraging banks to enhance their lending availability.