Bank concentration, institutional quality, and economic growth

Abstract

Purpose This study aims to examine the influence of institutional quality on the relationship between economic growth and banking sector concentration. Design/methodology/approach The sample of our study covers 15 Middle East and North African (MENA) countries over the period 1996-2010. The results are estimated based on static and dynamic panel data analysis. Findings The results reveal a positive and significant relationship between economic growth and each banking concentration and institutional quality. The results support the argument that banking concentration and institutional quality are matters for growth in MENA countries. The results also indicate that the interaction variable between concentration and institutional quality is negative and significant. Research limitations/implications Building on Petersen and Rajans’ (1995) argument, this study suggests that in the absence of an appropriate level of institutional quality, banks in MENA region can depend on their market power to protect their benefits. This can be achieved by building long-term relationships with their borrowers to provide continuing credit and subsequently enhancing economic growth. Practical implications Under the low level of institutional quality in MENA countries, regulators and decision-makers should thoroughly think before imposing any policy that aims to restrict banking market power because such action could harm the economy. Social implications In developing countries, banking concentration may have a positive impact on the economy. This outcome may lead to an improvement in the standard of living for the society. Originality/value This is the first known study, to the best of our knowledge, that examines the role of institutional quality in shaping the relationship between economic growth and banking concentration in MENA countries. The authors opted to select MENA countries’ data because they generally reflect an institutional setting similar to many developing countries. Therefore, the results could be applicable in many developing economies and will encourage other researchers to investigate this proposition.