Institutional environment and bank capital ratios

Abstract

We investigate the influence of the institutional environment on bank capital ratios. Using a sample of 149 banks operating in the Middle East and North Africa region for the period 2004 to 2014, we find that, when stock markets have little presence, institutional variables significantly affect risk-weighted regulatory capital ratios but not leverage ratios. Conversely, when stock markets are more developed, only leverage ratios are influenced by institutional factors. Our results also indicate that institutional variables affect non-weighted equity-to-asset ratios of banks that are listed on a stock exchange. Our findings contribute to the bank capital structure literature and have important policy implications for developing countries.

Factors Affecting Capital Structure of Conventional and Islamic Banks: Evidence from MENA Region

“…The results are in accord with Anarfo (2015), Al-Mutairi and Naser (2015), Papagianni (2013), Gropp and Heider (2010), Rajan and Zingales (1995), and Sheikh and Qureshi (2017). Nevertheless, contradicts Sghaier and Lahdhiri (2015) and Alraheb et al (2019) conclusion. Also, the tangibility variable has the same sign and significance as profitability with stronger effect on conventional banks as well.…”

“…The evidence also shows that size significantly and positively correlated with leverage for conventional banks (p < 0.01) and Islamic banks (p < 0.05), inferring that large banks utilize more debt because they are less risky (trade-off theory). These results contradict Sghaier and Lahdhiri (2015) and Alraheb et al (2019) findings but in line with Sheikh and Qureshi (2017). Furthermore, the analysis revealed that liquidity linked positively and significantly with leverage for conventional and Islamic banks, (p < 0.01).…”

“…The negative effect supports the trade-off theory and implies that banks with higher risk use less debt. Papagianni (2013) came to the same conclusion unlike Alraheb et al (2019) study.…”

“…Rajan and Zingales (1995), with respect to the Pecking order theory, argued that because large firms are less subject to asymmetric information in comparison to small firms they are abler to issue equity that is more sensitive to information asymmetry and thus have lower debt. Alraheb et al (2019) and Al-Mutairi and Naser (2015) found a negative link between leverage and size.…”

“…In a more recent study, Alraheb et al (2019) investigated the influence of the institutional environment on bank capital levels using a sample of 187 banks (148 conventional and 39 Islamic banks) from 15 MENA region countries 1 for the period 2004-2014. The study included several variables such as profitability (ROA), risk (loan loss provision to total loans; NPL), size, concentration (CONC), regulatory framework (REG) and real interest rate (RI).…”