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

• Published in: International journal of emerging markets 2022-07, Vol.17 (7), p.1635-1658
• Main Author: Alaoui Mdaghri, Anas
• Format: Article
• Language: English
• Subjects: Balance sheets; Bank failures; Bank liquidity; Banking industry; Capital markets; Commercial banks; COVID-19; Credit risk; Economic development; Economic growth; Emerging markets; Funding; GDP; Gross Domestic Product; International finance; Islam; Islamic financing; Liberalization; Lines of credit; Liquidity; Loans; Market shares; Nonperforming loans; Policy making; Small & medium sized enterprises-SME; Small business loans; Trade
• ISSN: 1746-8809; 1746-8817
• DOI: 10.1108/IJOEM-05-2021-0670

PurposeThe 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/approachBerger 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.FindingsThe 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/implicationsThe 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/valueTo 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.