The Institutional Quality Effect on Credits Provided by the Banks
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The Institutional Quality Effect on Credits Provided by the Banks Azmat Gani 1
& Tareq
Rasul 2
# International Atlantic Economic Society 2020
Abstract Research on developing economies is deficient in analysing institutional quality dimensions that are beyond standard determinants of the provision of credits by banks. This study fills this gap by adopting a broad-based modelling approach in examining the effects of institutional quality on credit provided by banks for a large sample of developing economies. A structural model, including balanced annual panel data from the World Bank World Development Indicators and Worldwide Governance Indicators for the period 2004 to 2017, was estimated using panel-corrected standard errors and two-stage least squares estimation techniques. The core variables determining the credit provided by banks were controlled for in the estimation phase. The findings showed that the rule of law, regulatory quality and the strength of legal systems are significant determinants of credit provided by banks, among other factors. Investments in improving institutional quality can be beneficial for credit diffusion by the banks. This study is distinct from previous empirical studies of the developing economies as it directs attention to institutional quality measures on bank credit expansion in an inclusive modelling framework. It makes a significant positive contribution to the finance institutional nexus literature in terms of understanding the value and role that institutional quality plays in fostering bank credit provision in developing economies. Keywords Bank credit . Developing countries . Legal systems . Regulatory quality JELs G38 . O50
* Azmat Gani [email protected]
1
Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, P. O. Box 20, Al Khod, 123 Muscat, Oman
2
Department of Marketing, Australian Institute of Business, Adelaide, Australia
Gani A., Rasul T.
Introduction The global economic system has experienced increasing levels of deterioration in the multilateral system of economic cooperation with speedier erosion of governance of the global financial systems in recent times (Bayer 2018). It is now well known that market-based economic activity cannot succeed unless appropriate institutions that support this are in place, as revealed in scholarly works from an institutional economic perspective (Rodrik 2007; La Porta et al., 1997, 2000). Corporate governance failures and weaknesses that allowed excessive risk-taking contributed to the Global Financial Crisis (GFC) of 2007–2008 (Strouhal et al., 2012). The unforeseen global events of the GFC (reviewed in Badarau and Lapleacru, 2020) triggered financial markets to demand sound and effective practices of corporate governance at all levels. Following the GFC, researchers have attempted to devote more attention to the quality and effectiveness of institutions in financial markets, mainly focusing on highincome countries which were subject to strong detrimental effects of the
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