Ownership, regulation and bank risk-taking: evidence from the Middle East and North Africa (MENA) region

• Pages: 23-43
• DOI: https://doi.org/10.1108/CG-07-2017-0135
• Published date: 17 September 2018
• Date: 17 September 2018
• Author: Faizul Haque
• Subject Matter: Corporate governance,Strategy

Ownership, regulation and bank

risk-taking: evidence from the Middle East

and North Africa (MENA) region

Faizul Haque

Abstract

Purpose –This study aimsto investigate how ownership structure andbank regulations individually and

interactivelyinfluence risk-taking behaviourof a bank.

Design/methodology/approach –This empirical framework is based on dynamic two-step system

generalisedmethod of moments estimation technique to analysean unbalanced panel data set covering

144 conventionalbanks from 12 Middle East and North Africa (MENA) countries.

Findings –The estimation results suggest that foreign shareholding has an inverse relationship with

bank risk-taking.In addition, official supervisory power is found tohave a positive association with bank

risk, and this relationshipis reinforced for banks with higher ownershipconcentration. In addition, capital

stringency increases bankrisk, whereas market discipline has an opposite effect, only in countries with

higher activity restrictions. Finally, the interaction between ownership concentration and activity

restrictionhas an inverse association with bank risk-taking.

Research limitations/implications –Overall, the evidence suggests that the Basel II framework and

the regulatory reform initiatives in the post-global financial crisis period do not seem to have reduced

bank risk-takingin MENA countries.

Originality/value –This study contributes to the literature on the effectiveness of regulatory reform

based on the three pillars of the BaselII guidance (capital regulations, market-orienteddisclosures and

official supervisorypower), and offers evidence in support of ‘‘political/regulatory capturehypothesis’’ of

bank regulation.The results also provide supportfor ‘‘global advantage hypothesis’’of bank ownership.

Keywords Ownership structure, Bank risk-taking, MENA countries, Bank regulation

Paper type Research paper

1. Introduction

The recent financial crisis highlighted several weaknesses in corporate governance (CG)

and risk management practices of banks in both developed and emerging economies.

Available literature (Anderson, 2009) suggests that a systematic breakdown in CG and

regulatory regimes influenced banks’ risk-taking behaviour in the financial sector, and thus

contributed to the severity of the financial crisis. In the wake of the crisis, the significanceof

the inter-relationships among internal CG mechanism (such as, ownership), institutional

governance mechanism (suchas, bank regulation) and bank-risk taking have become more

prominent to the policymakersto enhance banking sector stability and development.

Recognising the significance of CG and regulations, several studies (Laeven and Levine,

2009;Shehzad et al., 2010) examine the effects of ownership and bank regulations on risk-

taking, but they do not consider the impact of different types of ownership. While Laeven

and Levine (2009) considered the largest listed banks, Shehzad et al. (2010) covered a

shorter time span (2005-2007). The former deals with the default risk, whereas the latter

includes credit risks and capital adequacy. Several related studies (Barry et al.,2011;Haw

Faizul Haque is based at

the Department of

Accountancy, Economics

and Finance, Heriot-Watt

University - Dubai Campus,

Dubai, United Arab

Emirates.

JEL classif‌ication –G21, G28,

G32

Received 13 July 2017

Revised 18 January 2018

11 May 2018

Accepted 28 June 2018

An initial version of this paper

was presented at the Surrey-

Fordham international confer-

ence on ‘Banking, Finance,

Money and Institutions: The

Post Crisis Era’ in 2013. The

author acknowledges with

thanks the comments made by

the conference participants.

The author is also grateful to

Eddie Jones, Mustafa

Caglayan and Thankom Arun

for their useful comments.

DOI 10.1108/CG-07-2017-0135 VOL. 19 NO. 1 2019, pp. 23-43, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 23

et al.,2010;Iannotta et al.,2007) address the impact of ownership on bank risks in Europe

and East Asia. These studies are cross-sectional in nature and do not consider time

variations in ownership. Similarly,Brissimis et al. (2008) and Agoraki et al. (2011) addressed

the interrelationships among bank regulation, competition and risk-taking in European

banking, but they do not consider bank-specific ownership variables. In addition, available

empirical evidence on the relationship between bank regulation and risk-taking behaviour is

largely inconclusive. As Allen and Carletti (2013) argued, in the absence of an overarching

theoretical framework on bank regulation, there is a lack of consensus on what should be

done to reform regulation.

Moreover, most studies appear to be either global or Europe-specific, with relatively

less studies focussing on emerging economies. To the best of our knowledge, existing

literature does not seem to address the effects of both ownership and individual

components of bank regulation, as well as their interactions in a single empirical

framework especially in the context of Middle East and North Africa (MENA) countries.

For example, a growing body recent literature (Ghosh, 2017;Srairi, 2013); Hammami

and Boubaker, 2015;Lassoued et al., 2016) examined the effects of CG or ownership

structure on bank performance in MENA countries, without taking into consideration the

effect of bank regulation. A related literature (Ghanem, 2017;Bitar et al., 2016)used

bank-level data on capital adequacy ratios, rather than overall indices of capital

stringency or other regulations such as supervisory power and market discipline.

Maghyereh and Awartani (2014) used an old set of data (2000-2009) to examine the

effect of bank regulation on bank distress in the GCC countries, without addressing the

effects of the interaction variables.

Therefore, this study attempts to address this gap by examining the impact of ownership

and bank regulation on bank risk-taking in the context of MENA region. Considering the

uniqueness in political and institutional settings and regulatory reforms, it is imperative to

study MENA banking[1]. As Kobeissi and Wang (2009) observed, the institutional

environments, deregulation and privatisation processes in Arab countries are mostly

relevant and specific to this region.

One important policy-oriented motivation of this study is to examine the effects of ongoing

banking reform initiatives that started taking place in the most of MENA countries in the

2000s under the Basel regulatory framework. These reforms are intended to improve CG,

capital adequacy, disclosures and transparency, and prudentialregulations (OECD, 2009),

so as to reduce bank risk-taking behaviour and to enhance financial stability. The MENA

region represents an interesting case for this study partly because of the dominance of

concentrated banking sector in its financial system, together with unique ownership

structure (significant family and government ownership of banks) and monopolistic

competition (Turk-Ariss, 2009;Naceur and Omran, 2011;Awartani et al., 2016). As the

corporate bond and equity markets are underdeveloped in this region, the corporate sector

depends largely on bank finance (OECD, 2009;Awartani et al., 2016). Moreover, as the

World Bank (WB) (2011) and Prasad et al. (2016) observed, the adoption of the Basel

guidelines has resulted in partial success in terms of regional convergence in bank

regulations, although there are divergences among MENA countries dependingon the level

of sophistication of a country’sfinancial system.

We carry out our examination using an unbalanced panel data set which covers data from

144 commercial banks based on 12 MENA countries over a period of 12 years (2001-2012).

We adopt generalised method of moments (GMM) estimation technique to carry out our

analysis. In doing so, we examine the following three research questions in detail from the

perspective of MENA countries:

RQ1. How do ownership concentration and types of ownership (e.g. government and

foreign shareholdings)influence the risk-taking behaviour of a bank?

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