How does bank liquidity creation affect non-performing loans in the MENA region?
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 25 November 2021
Issue publication date: 4 July 2022
Abstract
Purpose
The 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/approach
Berger 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.
Findings
The 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/implications
The 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/value
To 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.
Keywords
Acknowledgements
The author thanks the editor-in-chief, senior area editor and anonymous reviewers for their valuable feedback and insightful comments during the review process.
Citation
Alaoui Mdaghri, A. (2022), "How does bank liquidity creation affect non-performing loans in the MENA region?", International Journal of Emerging Markets, Vol. 17 No. 7, pp. 1635-1658. https://doi.org/10.1108/IJOEM-05-2021-0670
Publisher
:Emerald Publishing Limited
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