Impact of oil and gas prices shocks on banks’ deposits in an oil and gas-rich economy

Abstract

Purpose The purpose of this paper is to investigate and compare the impact of oil and gas prices changes on bank deposits at the aggregate as well as at the level of commercial and Islamic banks in Qatar over the period 2000–2016. Design/methodology/approach Using the BankScope Database as well as bank-level balance sheet and financial statements data, the authors use one-step system GMM dynamic model to examine and compare the association between oil and gas prices changes with bank deposits in Qatar. The authors also test hypotheses of direct and indirect impacts of oil and gas prices changes on bank deposits. Findings The results indicate that oil and gas prices changes have a direct impact on deposits of banks at the aggregate level in Qatar. However, the authors find that oil and gas price changes significantly affect deposits of Qatari commercial banks directly prompting enhanced lending by banks and the consequent business activities in the economy, while their impact on the deposits of Qatari Islamic banks is indirect, i.e. the impact is permeated through the macroeconomic and institutional characteristics of the country that are reinforced by the growing expectations and commercial sentiment of the country. The authors find that significant association between oil price changes and deposit growth during the global financial crisis 2008 has been distorted. However, the authors find that there was a sharp rise in the deposits of Islamic banks during the period of global financial crisis. Practical implications The results of this study necessitate policy measures that can counter the effects of changes in oil and gas prices on the effectiveness of bank deposits. Originality/value It is widely recognized that oil and gas prices and the level of production are of great importance to the economic development of oil and gas exporting countries. So far, however, no econometric study has been reported in the literature which analyses and compares the impact of oil and gas prices changes on bank deposits of commercial and Islamic banks and also at the aggregate level in any of the oil-exporting economies. Thus, this study provides the first empirical evidence on distinct direct and indirect channels through which oil and gas prices changes may affect bank deposits.

Do oil and gas price shocks have an impact on bank performance?

“…They find strong links between oil price movements and bank balance sheets. Saif-Alyousfi et al (2018b) also find that a higher growth rate of oil and gas prices is associated with a rise in the bank deposits ratio in Qatar. We complement these studies by investigating from a global perspective how changes in oil and gas prices affect performance in oil-exporting countries.…”

“…β 0 is a constant term; OIL is the oil price shocks indicators; GAS is the natural gas price shocks indicators; BAN is the bank-specific factors; MAC is the macro-economic variables; FIN is the financial structure indicators; and ε is the error term. Saif-Alyousfi (2019), Saif-Alyousfi et al (2018a, 2018b, 2018c, and Poghosyan and Hesse (2016) argue that study of bank performance determinants may suffer from endogeneity bias, omitted variables and the strong persistence of bank profit. They argue that the persistent profit reflects the barriers to market competition and sensitivity of the information to macroeconomic collapse, which is serially related.…”

“…Although the gas sector still plays a significant role in the economic growth of the Arab region, these authors did not consider the effect of gas price shocks on bank profitability. For example, at the time of the global financial crisis of 2008 Qatargas had seven LNG megatrains, of which four are the largest in the world, each with a production capacity of 7.8 MTA, accounting for almost 38% of the overall GDP of Qatar (Saif-Alyousfi et al, 2018a, 2018b. However, Poghosyan and Hesse's study period did not go beyond the global financial crisis, which includes the period of political instability witnessed in the region due to the Arab Spring revolution and the Yemen War.…”

“…As GCC countries are key members of OPEC (Kontaxis, 2016) we have used both WTI and Brent as reference oil price parameters to check the robustness of our results: Brent as an alternative to WTI has a similar effect on the growth of bank performance in oilexporting countries. For gas prices, we use natural gas prices in line with Saif-Alyousfi et al (2018a, 2018b.…”

The Effect of Financial Leverage on The Islamic Banks’s Performance in The Gulf Cooperation Council (GCC) Countries

“…These Islamic banks constitute an important source of financial intermediation, controlling on average 24 percent of the region's banking system assets (Al- Hassan, Khamis, & Oulidi, 2010). However, the majority of the prior studies in GCC countries have not examined the effect of the financial leverage on the Islamic bank's performance (Poghosyan and Hesse, 2009;Mirzaei and Moore, 2016;Ashraf, Ramady, & Albinali, 2016;Saif-Alyousfi, 2019;Saif-alyousfi, Md-Rus, & Mohd, 2018;Saif-Alyousfi, Saha, & Md-Rus, 2017a, 2017b, 2018b, 2018c, 2018a. Hence, this study aims at filling this gap by examining the effect of the financial leverage on the performance of the Islamic banks' performance during the period from 2005 to 2017.…”