Political transition and determinants of liquidity creation in middle East and North Africa countries
Political transition is one of the political risks that can lead towards discontinuity in economic activities. Unsurprisingly, political transition (Arab Spring) in the MENA region has affected its economy. The banking sector, being a crucial element in the financial system, is not spared. Liquid...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
2020
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/91331/1/GSM%202020%204%20-%20IR.pdf http://psasir.upm.edu.my/id/eprint/91331/ |
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| Institution: | Universiti Putra Malaysia |
| Language: | English |
| Summary: | Political transition is one of the political risks that can lead towards discontinuity in
economic activities. Unsurprisingly, political transition (Arab Spring) in the MENA
region has affected its economy. The banking sector, being a crucial element in the
financial system, is not spared. Liquidity creation is one of the main functions of banks
that can be affected by various factors. This study aims to examine the impact of
political risk, bank-specific factors, banking industry factors and macroeconomic
factors on liquidity creation; vis-a-vis political transition (Arab Spring). Bank type
(i.e. Islamic or conventional), availability of deposit insurance system and bank size
were included as control variables in this study. The study sample included 55 Islamic
and conventional banks from Arab Saudi, Bahrain, Egypt, Jordan, Kuwait, Lebanon
and Tunisia for the period between 2006 and 2015. In the period of pre-political
transition, the findings revealed a positive relationship between liquidity creation and
political risk, indicating that political instability diminishes liquidity creation.
However, bank capital, stability of bank, competition, stability of banking industry,
unemployment and economic growth, negatively influenced liquidity creation. For the
period of post-political transition, similar results were estimated regarding liquidity
creation relationship with political risk, stability of bank, stability of banking industry
and unemployment. Nevertheless, the findings in the post-Arab Spring period were in
contrast with the results of pre-political transition regarding the liquidity creation
relationship with competition and economic growth. Moreover, in the period postpolitical
transition, bank capital has no effect on liquidity creation, while nonperforming
loans positively influenced liquidity creation. It was notable that there was
no difference between the results for Islamic and conventional banks. Also, the
availability of deposit insurance system reduced liquidity creation in both periods.
This study provides a new perspective on the relationship between liquidity creation
and political risk. It extends the empirical and theoretical aspects of research and offers
more comprehensive and empirical views on how liquidity creation is influenced by
banks’ specific factors, banking industry factors and macroeconomic factors in pre and post- political transitions. The findings can provide early warning of risks that
banks are likely to face in liquidity creation. Regulations should focus on banking
supervision quality by adopting policy measures that increase competition and
maintain banks’ stability. |
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