Is the relationship between corruption, government stability and non‐performing loans non‐linear? A threshold analysis for the MENA region

Abstract

The purpose of this article is to check whether there is a threshold effect in the government stability, corruption and non‐performing loans (NPLs) relationship in the MENA region. To this end, we used a sample of MENA banks over the period 2004–2017. Empirical results of the panel smooth transition regression model indicate that there is a threshold effect in the government stability, corruption and NPLs relationship. More specifically, we have found that the impact of corruption and government stability on NPLs is negative and significant only if a certain threshold level has been attained; until then, the effect is insignificant.

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

“…As per control variables, size, regulatory capital, profitability, deposits to assets and monetary policy were negatively and significantly associated with NPLs, consistent with prior studies (Abdelaziz et al, 2020;Hakimi et al, 2020;Jabbouri and Naili, 2019). Our findings indicated that larger banks, which are well capitalized with high levels of deposits and better performance, tended to have lower NPLs.…”

“…A restrictive monetary policy is accompanied by high-interest rates, which increase the cost of financing borrowers and may reduce the number of loans granted, likely decreasing the default rate in the bank's loan portfolio. We integrated the inflation rate (INF) following Ghosh (2015) and Hakimi et al. (2020).…”

“…Third, limited literature has emerged regarding the nexus between institutional quality, government stability and NPLs (e.g. Boudriga et al, 2010;Hakimi et al, 2020). Banking activities rely heavily on the institutional environment.…”

“…A restrictive monetary policy is accompanied by high-interest rates, which increase the cost of financing borrowers and may reduce the number of loans granted, likely decreasing the default rate in the bank's loan portfolio. We integrated the inflation rate (INF) following Ghosh (2015) and Hakimi et al (2020). High inflation may be associated with a rise in nominal interest rates, increasing the interest cost and reducing borrowers' ability to repay their bank debt, causing a rise in NPLs.…”

Do shadow economy, institutional regulatory framework, government stability, and corruption affect non‐performing banking loans in emerging market economies: A dynamic common correlated effect (DCCE) approach

“…First, this study adds to the literature void on the nexus between institutional quality and NPLs by investigating the impact of government stability, corruption, and institutional regulation on NPLs in emerging countries. However, few studies have explored the nexus between institutional quality and NPLs (Hakimi et al 2020), but as per the author's knowledge, no study has explored the above relationship in the context of emerging market economies. Second, it investigates the relationship between the shadow economy and NPLs, which is not covered in previous literature.…”