Do FDI inflows affect the off-balance sheet activities of banks in GCC economies?

Abstract

PurposeThis paper investigates and compares the impact of foreign direct investment (FDI) inflows (flow and stock) on bank off-balance sheet (OBS) activities in aggregate as well as at the level of conventional and Islamic banks in GCC countries. It also tests hypotheses of direct and indirect impacts of FDI flow and FDI stock on OBS activities.Design/methodology/approachThis paper uses both static and dynamic panel generalized methods of moments (GMM) estimation techniques to analyze the data of 70 GCC banks (45 conventional and 25 Islamic banks) over the period 1995–2017.FindingsEmpirical results indicate that FDI flow and FDI stock have a significant negative direct impact on OBS activities of GCC banks. The results lend support for the direct channel hypothesis for the effect of FDI on OBS activities and find no evidence in support of the indirect channel hypothesis. OBS activities from conventional banks appear to be more affected than those from Islamic banks.Practical implicationsThe results of this study are expected to trigger appropriate policy response from the central banks of the respective GCC countries as well as their governments.Originality/valueIt is widely recognized that FDI inflows are of great importance to the economic development of emerging and developing countries. However, their impact on bank OBS activities has so far not been subject to accurate empirical assessment. This paper aims to fill this gap by providing an in-depth quantitative analysis of the impact of FDI flow and FDI stock separately, on bank OBS activities for both conventional and Islamic banks in GCC countries. It distinguishes between direct and indirect channels through which FDI flow and FDI stock may affect OBS activities for banks as a whole and both conventional and Islamic banks separately. It also uses both static and dynamic panel GMM estimation techniques to analyze the data.

Determinants of bank profitability: evidence from 47 Asian countries

“…To examine the impact of bank-specific (internal) factors, financial structure and macroeconomic (external) indicators as well as global financial crises on bank profitability, this paper follows Saif-Alyousfi (2019, 2020a, b) and Saif-Alyousfi et al (2018a, b, 2020a, b) and employs both static and dynamic panel estimation techniques. The static techniques used here are pooled ordinary least squares (OLS), the random effects (RE) model, the fixed effects (FE) model, generalized least squares (GLS), panel corrected standard errors (PCSE) and two-stage least squares (2SLS).…”

“…Golin and Delhaise (2012) indicate that adequate profitability of banks is very important in order to maintain bank solvency and to enable them to survive under an unstable economic environment. Banks in any country have a commanding role to ensure economic growth, in general, and in the financial sector, in particular, since efficient channelization of savings to investment is an essential prerequisite to growth (Saif-Alyousfi, 2020a, b). Banking insolvencies and bankruptcy, in turn, have significant negative fall-out on the economic development in a country (Levine, 1997; Pasiouras and Kosmidou, 2007).…”

“…Previous studies on the determinants of bank profitability mainly focus on the United states or European area, with much less discussion and insight into the banking industry in Asian economies (see, e.g. Saif-Alyousfi et al , 2018a, b; 2020a, b; Saif-Alyousfi, 2019, 2020a, b; Lee and Hsieh, 2013; Soedarmono et al , 2013). The question now arises as to whether the United States or European results are valid for Asian countries.…”

Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries

“…Compared to the banks in other regions, the lower profitability of GCC banks raises a question about deciphering the determinants of profitability and the risk of banks in the GCC economies. This has raised concerns about the banking system's stability in the GCC economies following the global financial crisis (Saif-Alyousfi et al, 2020a, 2020b, 2020c.…”

“…The reform initiatives in the GCC banking arena are aimed at strengthening the framework of banking supervision and regulations (Saif-Alyousfi et al, 2020a, 2020b, to enhance productivity and improve efficiency in the allocation of banking resources. However, with a moderate growth rate, there has been a rapid rise and volatility in credit growth in recent years, causing regulatory concerns.…”