The Robustness of the Determinants of Overall Bank Risks in the MENA Region
Abstract
:1. Introduction
1.1. Objectives
- Identify the country-specific variables influencing overall bank risks
- Identify the bank-specific variables influencing overall bank risks
- Examine the time effect and country effect on overall bank risks.
1.2. Contribution
1.3. Contributions Related to Bank-Specific Variables
1.4. Contributions Related to Country-Specific Variables
2. Literature Review
2.1. Country-Specific Variables
- (1)
- Gross domestic product (GDP): GDP can have mixed implications for overall bank risks. According to many authors (Hamdi and Hakimi 2019; De-Ramon et al. 2020; Pham et al. 2021), GDP has a positive impact on bank overall risks. This result has suggested that an increase in the level of economic growth increases the level of bank profitability. Thus, banks expand their businesses, which improves their stability, and thus the Z-score increases. However, it can be noted that GDP and overall bank risks can be negatively related (Imbierowicz and Rauch 2014; Ghenimi et al. 2017; Chen 2018; Ghassan and Guendouz 2019; Rahman et al. 2021).
- (2)
- Inflation. On the one hand, inflation has a negative effect on overall bank risks (Ghassan and Guendouz 2019; De-Ramon et al. 2020; Rahman et al. 2021). These authors have argued that when countries face inflationary pressures, they weaken the borrowers’ repayment capacities, and, thus, the credit risk rises and leads to a rise in the overall risk of the bank, and, thereby, the Z-score decreases. On the other hand, some studies (Ghenimi et al. 2017; Abbas et al. 2021; Soebyakto et al. 2020; Pham et al. 2021) have stated that inflation and Z-score are positively related. Hamdi and Hakimi (2019) have stated that inflation has no significant effect on overall bank risks.
- (3)
- Unemployment. Dawood et al. (2016) and De-Ramon et al. (2020) have found that unemployment has a significant negative influence on overall bank risks. They have stated that a higher level of unemployment rate reduces the national income, weakening borrowers’ repayment capacities and, consequently, increasing the credit risk and, thus, the overall risk resulting in a decrease in the Z-score.
- (4)
- Financial Crisis. According to Hamzani and Achmad (2018), financial crisis has a negative impact on overall bank risks. This finding was reinforced by the studies of many authors (Imbierowicz and Rauch 2014; Ghenimi et al. 2017; Chen 2018; Hamdi and Hakimi 2019). These authors have stated that financial crisis always hits banks’ performance in terms of solvency, liquidity, operating efficiency, and profitability, and, consequently, increases the probability of bankruptcy in banks which drives the Z-score down. However, Beck et al. (2013) has reported that financial crisis has a positive effect on overall bank risks in their investigation of the MENA region. This could be justified by the fact that a higher level of capitalization and liquidity reserves in the MENA countries leads to better stability during international financial crisis. Moreover, another possible explanation is the partial integration of some MENA countries into the global financial system that triggers upward movement in the Z-score.
2.2. Bank-Specific Variables
- (1)
- Operating Efficiency. Studies in the literature have concluded that operating efficiency has a positive impact on overall bank risks (Imbierowicz and Rauch 2014; Ghenimi et al. 2017; Chen 2018; Ghassan and Guendouz 2019; De-Ramon et al. 2020; Soebyakto et al. 2020; Rahman et al. 2021). These authors have justified their views by arguing that a higher level of operating efficiency implies that the banks have sound management in administrating internal costs. Cost-efficiency results in higher bank stability, which increases the Z-score. In this regard, improvements in operating efficiency strengthen banks’ performance and survival in the banking sector, and, thus, the Z-score rises.
- (2)
- Bank Size. There are two opposing arguments regarding the relation between size and overall bank risks. The “too-big-to-fail” theory states that larger banks are more likely to take on more risk, and, consequently, larger banks have a greater probability of failure. In this context, the bank’s size decreases banking stability and Z-score. This theory is reinforced by the findings of many studies (Dawood et al. 2016; Ghenimi et al. 2017; Hamzani and Achmad 2018; Ghassan and Guendouz 2019). However, size and overall bank risks can be positively related (Imbierowicz and Rauch 2014; Pham et al. 2021; Nguyen 2020; Abbas et al. 2021). This implies that the greater the size of a bank indicates that the bank has well-diversified portfolios and is more efficient because of economies of scale, which drives Z-score up and enhances stability.
- (3)
- Bank Profitability. The effect of profitability on overall bank risks could be positive or negative. From one perspective, results show that profitability and Z-score are positively and significantly related (Ghenimi et al. 2017; Hamdi and Hakimi 2019; Abbas et al. 2021; Pham et al. 2021). The relationship is attributed to the fact that a higher level of profitability means banks have less incentive to invest in risky investments, which drives the Z-score up and, thus, maintains bank stability. Nevertheless, according to Jan and Marimuthu (2015), profitability has a negative impact on overall bank risks. They have demonstrated that a higher level of profit margin encourages banks to invest in risky investments, which lowers Z-score, and, thus, their overall risk increases.
2.3. Data, Variables and Statistical Estimation
Data
2.4. Empirical Model
2.5. Variables Definitions and Measurement
- (1)
- Dependent Variable
- (2)
- Independent Variables
2.5.1. Country-Specific Variables
2.5.2. Bank-Specific Variables
3. Results and Discussion
3.1. Descriptive Statistics
3.2. The Significance of Country-Specific and Bank-Specific on Overall Bank Risks
4. Testing for Robustness
5. Conclusions
- (a)
- The unemployment rate had a negative effect on high overall bank risks in the period 2000–2010. This result reflects a reality about the job market in the MENA region at large and its effects on overall bank risk. It is conceivable that unemployment hinders banks from lending, and, to a large extent, loans are subject to high probability of default due to the inability to pay them off. According to the estimates of the World Economic Outlook (2021), the average unemployment rate in the MENA was estimated to be 13.2%. It was the highest average rate in comparison to the world average (6.3%), the average in East Asia (3.8%), and the average in South Asia (4.7%).Nevertheless, this effect became positive for low overall risk banks, especially in the period 2011–2020. In terms of robustness, the effect of unemployment in Egypt was quite robust. During the period of the study, the average unemployment growth rate reached 10.71% (World Economic Outlook 2021), which was the highest average in the world regions.
- (b)
- The financial crisis had a positive effect on the MENA overall bank risks in the period 2000–2010, but only for the low overall bank risks.
- (c)
- Bank operating efficiency played a significant role in improving overall bank risks. A robust and negative effect of cost/income ratio was observed in the period 2010–2020, but only for high overall bank risk. In terms of bank asset and liability management, this result calls for the adoption of cost reduction strategies to reduce the overall bank risks.
- (d)
- An extended contribution of this paper was that it examined the time effect, referred to in this paper as “duration” effect. The results showed that low overall-risk banks were able to manage overall risks in a shorter time than high overall bank risks, where the effect of duration was positive.
- (e)
- In terms of the country effect, the results for Egypt only showed that the overall bank risk had positive effects in the period 2000–2010, but negative and significant effects in the period 2011–2020, where overall bank risks reduced.
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
Appendix A
Research Variables | VIF |
---|---|
GDP | 1.507 |
Inflation | 1.530 |
Unemployment | 4.455 |
Financial Crisis | 1.104 |
Cost/income | 1.449 |
Bank Size | 4.530 |
ROE | 1.238 |
Time effect | 1.044 |
Country effect (UAE) | 1.431 |
Country effect (Egypt) | 4.275 |
Country effect (Morocco) | 3.320 |
Variables | Fixed Effect | Random Effect | Hausman Test | ||
---|---|---|---|---|---|
Coefficient | Prob. | Coefficient | Prob. | ||
C | 0.174881 | 0.0000 | 0.181683 | 0.0000 | 0.0007 |
GDP | 0.015534 | 0.6606 | 0.003385 | 0.9225 | |
Inflation | −0.021893 | 0.4165 | −0.004926 | 0.8501 | |
Unemployment | −0.006877 | 0.9369 | −0.109801 | 0.0884 | |
Financial Crisis | 0.003154 | 0.2730 | 0.002724 | 0.3374 |
Variables | Fixed Effect | Random Effect | Hausman Test | ||
---|---|---|---|---|---|
Coefficient | Prob. | Coefficient | Prob. | ||
C | 0.178618 | 0.0000 | 0.182214 | 0.0000 | 0.2274 |
Cost/Income | 0.038562 | 0.0142 | 0.033665 | 0.0271 | |
Bank Size | −0.002939 | 0.0143 | −0.001950 | 0.0195 | |
ROE | −0.000349 | 0.0714 | −0.000352 | 0.0574 | |
Time effect | 0.000257 | 0.4471 | 0.000250 | 0.4590 | |
Country effect (UAE) | NA | NA | 0.014863 | 0.1023 | |
Country effect (Egypt) | NA | NA | −0.017603 | 0.0623 | |
Country effect (Morocco) | NA | NA | −0.063841 | 0.0000 |
Chi Square Statistics | |
---|---|
GDP growth | (1) = 566.23 (Prob > = 0.0721) |
Inflation Rate | (1) = 825.11 (Prob > = 0.3401) |
Unemployment Rate | (1) = 658.69 (Prob > = 0.2917) |
Financial Crisis | (1) = 813.83 (Prob > = 0.0918) |
Cost/Income ratio | (1) = 639.46 (Prob > = 0.3521) |
Bank Size | (1) = 558.82 (Prob > = 0.7421) |
Return on Equity | (1) = 459.83 (Prob > = 0.7421) |
Country | Bank |
---|---|
KSA | National Commercial Bank (NCB) |
KSA | Saudi Hollandi Bank (Alawwal) |
KSA | Riyad bank (RIBL) |
KSA | Saudi British Bank (SAAB) |
KSA | Samba Financial Group |
KSA | Arab National Bank (ANB) |
KSA | Banque Saudi Fransi JSC |
Kuwait | National Bank of Kuwait |
Kuwait | Gulf Bank |
Kuwait | Commercial Bank of Kuwait (CBK) |
Kuwait | Burgan Bank (BURG) |
Kuwait | Al Ahli Bank of Kuwait (ABK) |
Qatar | Qatar National Bank |
Qatar | Commercial Bank of Qatar (COMB) |
Qatar | Doha Bank |
Qatar | Ahli Bank (AABQ) |
Qatar | Al Khalij Commercial Bank (KCB) |
UAE | Abu Dhabi Commercial Bank (ADCB) |
UAE | National Bank of Fujairah PJSC |
UAE | The National Bank of Ras al-khaimah (RAK) |
UAE | Commercial Bank International (CBI) |
UAE | National Bank of Umm Al-Qaiwain (NBQ) |
UAE | Mashreqbank |
Egypt | The National Bank of Kuwait—Egy |
Egypt | Société Arabe Internationale de Banque (SAIB) |
Egypt | Suez Canal Bank |
Egypt | Credit Agricole Egypt (CIEB) |
Egypt | Commercial International Bank (CIB) |
Egypt | Egyptian Gulf Bank (EGB) |
Morocco | aAttijariwafa bank |
Morocco | Banque Centrale Populaire (BCP) |
Morocco | Bank of Africa Banque Marocaine du Commerce Exterieur (BCME) |
Morocco | Crédit Agricole du Maroc (CDM) |
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Variable Type | Variable Name | Appreviation | Measurement |
---|---|---|---|
Dependent Variable | Bank Total Risks | Z-score | ROA = Net profit/Total assets CAR = Capital/Total Asset ratio. Capital includes equity plus reserves for loan loss, plus long-term debt = Volatility of Bank’s ROA being measured by the standard deviation of ROA for the first two years rolling up to 20 years. The rolling basis ensures that time-varying volatility of ROA is accommodated. |
Independent Variables | Growth Rate of Gross Domestic Product | GDPit | Annual Growth rate |
Inflation | INFit | Percentage change in Consumer Price Index | |
Unemployment | UNMit | Annual Rate of Unemployment | |
Financial Crisis CRISISit | dummy variable | 1 for the year 2008, and 0 otherwise | |
Bank Efficiency EFFit | Cost/Income ratio | Operating Costs/Operating Income | |
Bank Size | SIZEit | Natural Logarithm of Total Asset | |
Profitability | ROEit | Net Income after taxes/Total Equity | |
Time Effect | Durationit | Time effect using a dummy variable, when z score increases = 1, otherwise = 0 | |
Country Effect | Countryeffectit | Country effect using a dummy variable = 1 for a respective country, 0 otherwise |
Mean | Median | Minimum | Maximum | Std. Deviation | |
---|---|---|---|---|---|
GDP annual growth rate | 0.0338 | 0.0300 | −0.0808 | 0.1923 | 0.0452 |
Inflation Annual Rate | 0.0626 | 0.0371 | −0.0486 | 0.2951 | 0.0611 |
Unemployment Annual Rate | 0.0708 | 0.0820 | 0.0011 | 0.1358 | 0.0409 |
Financial Crisis (Dummy variable) | 0.3911 | 0.0000 | 0.0000 | 1.0000 | 0.4883 |
Cost/income ratio | 0.3830 | 0.3678 | 0.0000 | 0.8344 | 0.1158 |
Bank Size (natural log of Total Assets) | 6.6439 | 4.3635 | 0.0000 | 19.2761 | 3.7143 |
Return on Equity | 2.5017 | 0.1543 | −3.0436 | 55.7300 | 8.8210 |
Time effect (Duration of an increase in Z score) | 6.9926 | 7.0000 | 0.0000 | 14.0000 | 3.8234 |
KSA (Dummy Variable) | 0.2121 | 0.1801 | 0.0000 | 1.0000 | 0.4091 |
Kuwait (Dummy Variable) | 0.1515 | 0.0000 | 0.0000 | 1.0000 | 0.3588 |
Qatar (Dummy Variable) | 0.1515 | 0.0000 | 0.0000 | 1.0000 | 0.3588 |
UAE (Dummy Variable) | 0.1818 | 0.0000 | 0.0000 | 1.0000 | 0.3860 |
Egypt (Dummy Variable) | 0.1818 | 0.0000 | 0.0000 | 1.0000 | 0.3860 |
Morocco (Dummy Variable) | 0.1212 | 0.0000 | 0.0000 | 1.0000 | 0.3266 |
Bank Total Risk (Z-score) | 3.4960 | 3.0138 | −2.5608 | 65.2293 | 4.4888 |
Variable | Coefficient | |
---|---|---|
Country-Specific | Bank-Specific | |
Constant | 2.846728 (7.11) *** | 7.422686 (8.981031) *** |
GDP growth | 3.783090 (0.95) | |
Inflation Rate | 5.631 (1.97) ** | |
Unemployment Rate | −12.589 (−2.78) *** | |
Financial Crisis | 2.709 (7.85) *** | |
Cost/Income ratio | −5.464 (−3.15) *** | |
Bank Size | −0.090 (−1.53) | |
Return on Equity | −0.043 (−2.074) ** | |
Time effect (Duration) | −0.1392 (−3.171) *** | |
Country effect (UAE) | 0.1729 (0.354) | |
Country effect (Egypt) | −0.516 (−0.938) | |
Country effect (Morocco) | −0.721 (−1.080) | |
Country effect (Kuwait) | Omitted | |
Country effect (Qatar) | Omitted | |
N | 660 | 660 |
Adjusted R-squared | 0.1056 | 0.0331 |
F-statistic | 21.433 *** | 4.392 *** |
D-W | 2.851 | 2.331 |
Variable | Country-Specific Estimates | Bank-Specific Estimates | ||
---|---|---|---|---|
2000–2010 | 2011–2020 | 2000–2010 | 2011–2020 | |
Constant | 11.102 (1.233176) | |||
GDP growth | −70.49 (−1.225) | 10.092 (4.718) *** | ||
Inflation Rate | 53.416 (1.021) | 2.904 (2.244) ** | ||
Unemployment Rate | −161.55 (−1.886) * | 4.968 (0.0187) ** | ||
Financial Crisis | 17.382 (2.610) *** | Omitted | ||
Cost/Income ratio | −7.542 (−0.499) | −3.815 (−5.502) *** | ||
Bank Size | 4.873956 (1.294) | −0.0065 (−0.082) | ||
ROE | 0.0133 (0.076) | −0.004 (−2.164) ** | ||
Time effect (Duration) | 21.7406 (2.620) *** | −0.208702 (−0.960) | ||
Country effect (UAE) | 2.414866 (0.115202) | 0.9377 (1.884) * | ||
Country effect (Egypt) | Omitted | 0.654020 (2.877) *** | ||
Country effect (Morocco) | Omitted | Omitted | ||
Country effect (Kuwait) | 35.867149 (1.205488) | Omitted | ||
Country effect (Qatar) | 45.787833 (1.575197) | Omitted | ||
N | 355 | 330 | 341 | 320 |
Adjusted R-squared | 0.0141 | 0.1155 | 0.0257 | 0.14575 |
F-statistic | 2.268 * | 15.289 *** | 2.281 ** | 10.070 *** |
D-W | 0.9863 | 0.4896 | 1.0463 | 0.6636 |
Variables | 1st Quartile (High Overall Risk) | 4th Quartile (Low Overall Risk) |
---|---|---|
Constant | 1.0019 (3.315) *** | 35.831 (1.270) |
GDP growth | 1.251 (0.881) | −35.131 (−0.594) |
Inflation Rate | 0.7299 (0.484) | −98.380 (−1.698) * |
Unemployment Rate | −5.669 (−2.836) *** | 482.862 (2.893) *** |
Financial Crisis | −0.208 (−1.364) | 28.879 (4.277) *** |
Cost/Income ratio | −0.838 (−1.911) * | −26.925 (−1.381) |
Bank Size | 0.021 (0.464) | −4.474 (−1.179) |
ROE | 0.003 (1.379) | −0.1311 (−0.623) |
Time effect (Duration) | 0.353 (1.970) ** | −13.048 (−2.244) ** |
Country effect (UAE) | 0.160 (0.548) | −0.176 (−0.006) |
Country effect (Egypt) | 0.548 (2.301) ** | −53.278 (−4.614) *** |
Country effect (Morocco) | Omitted | Omitted |
Country effect (Kuwait) | Omitted | Omitted |
Country effect (Qatar) | Omitted | Omitted |
N | 171 | 169 |
Adjusted R-squared | 0.1202 | 0.2264 |
F-statistic | 3.323 *** | 4.783 *** |
Std. Error of the Estimate | 0.722 | 0.26605 |
D-W | 1.687 | 0.916 |
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Eldomiaty, T.; Youssef, A.; Mahrous, H. The Robustness of the Determinants of Overall Bank Risks in the MENA Region. J. Risk Financial Manag. 2022, 15, 445. https://doi.org/10.3390/jrfm15100445
Eldomiaty T, Youssef A, Mahrous H. The Robustness of the Determinants of Overall Bank Risks in the MENA Region. Journal of Risk and Financial Management. 2022; 15(10):445. https://doi.org/10.3390/jrfm15100445
Chicago/Turabian StyleEldomiaty, Tarek, Amr Youssef, and Heba Mahrous. 2022. "The Robustness of the Determinants of Overall Bank Risks in the MENA Region" Journal of Risk and Financial Management 15, no. 10: 445. https://doi.org/10.3390/jrfm15100445