How does bank liquidity creation affect non-performing loans in the MENA region?

Abstract

PurposeThe study aims to empirically examine the effect of bank liquidity creation on non-performing loans (NPLs) in the Middle East and North Africa (MENA) region.Design/methodology/approachBerger and Bouwman's (2009) three-step methodology was employed to calculate the level of liquidity creation of a selected sample of 111 commercial banks in ten MENA countries from 2010–2017. Next, the two-step system generalized method of moments (GMM) estimator was used to investigate the linkage between bank liquidity creation and NPLs.FindingsThe results demonstrated a significant negative effect of bank liquidity creation on NPLs in the short and long term, implying that liquidity creation through both on- and off-balance sheet activities decreases NPLs. These findings accord with the “economic-enhancing” view. Furthermore, regression analysis investigated whether this relationship remained similar for Islamic and conventional banks. The results showed that liquidity creation diminishes Islamic and conventional bank NPLs.Research limitations/implicationsThe empirical findings raise several significant policy implications. Bank liquidity creation may decrease rather than increase NPLs, although the process of liquidity creation is viewed as risky by rendering banks more illiquid. Therefore, policy-makers should encourage bank liquidity creation to stimulate the economy. In a robust economy, borrowers are more likely to repay their debts, consequently diminishing banks' NPLs.Originality/valueTo the best of the author's knowledge, the current study is the first to provide empirical evidence on the effect of bank liquidity creation on NPLs in MENA countries.

Liquidity creation and bank risk-taking: Evidence from a transition market

“…Estimated results show that bank liquidity creation negatively while bank funding diversity positively affects NPLs. Our findings are consistent with [ 6 ] that banks could boost economic growth by creating liquidity, thereby improving borrowers' repayment ability. Said another way, banks could diminish NPLs by increasing liquidity.…”

“…[ 5 ] suppose bank risk-taking behavior is associated with policies that increase risk through any channels. Credit risk is one of the most obvious risks to manage in the banking industry among the proxy indicators of bank risk-taking activities [ 6 ]. After the most recent global financial crisis (GFC), much research has been done on the fast-rising number of non-performing loans [ 7 , 8 ].…”

Probability of default and political instability in the MENA region

“…Subscripts (y, i, t) represent individual banks, countries and times. Consistent with Mdaghri's (2022) work, year dummy was used to account for any cross-sectional dependence in the data. Thus, we denote ‘dummy’ as a vector for dummy variables used in the study, including a dummy for the period, year and high-crisis countries in the region.…”

“…Therefore, more benefit is attached to the System GMM estimator as we finally adopted it for this study. We further estimate the long-run GMM to predict the impact of the political unrest on banking stability in the future following Mdaghri (2022).…”

Editorial: Avoiding the pitfalls of IJOEM desk rejection

“…Similarly, Ilyas and Rajasekaran (2022) highlight offer novel consolidation policy-related recommendations based on their examination of the non-life insurance sector in India. Others have examined a number of comparative emerging markets in Europe and Central Asia (Aristei and Gallo, 2022), MENA (Mdaghri, 2022) and ASEAN (Hui, 2022) among others.…”