The Effect of Macroeconomic Variables, Banking Variables, and Institutional Quality on Banking Lending Power in Iraq

Document Type : Research Paper

Authors

Department of Economics, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

Abstract

The primary aim of this research is to examine the factors influencing the performance of banking loans in Iraq. The study utilizes unbalanced panel data over eighteen years, from 2005 to 2022, focusing on eighteen selected listed banks at the Iraq Stock Exchange (ISX) based on data availability. Data sources include annual financial reports from selected banks, the Central Bank of Iraq, and World Bank indicators (WDI) covering banking, macroeconomic, and institutional quality information. The relationship is estimated using a system generalized method of moment (SGMM) approach. The results indicate that certain banking variables such as bank assets, return on assets (ROA), and deposit-to-capital ratio have a positive and significant impact on lending power in Iraq, while the real deposit rate has a negative influence. Among macroeconomic variables, the inflation rate, real exchange rate, and liquidity growth have significant adverse effects on lending power, while economic prosperity and GDP growth yield positive effects. During economic booms, bank lending power increases, while it decreases during recessions. The study also highlights the positive and significant impact of institutional quality on bank lending power, indicating the importance of robust legal and regulatory institutions in establishing a stable and predictable financial environment, and fostering confidence among banks to engage in lending activities within the Iraqi economy.

Keywords

Main Subjects

References

Adams, R.M., & Amel, D.F. (2005). The Effect of Local Banking Market Structure on the Banking-lending Channel of Monetary Policy. Board of Governance of the Federal Reserve System, Finance and Economics Discussion Series 2005–16. Retrieved from https://ideas.repec.org/p/fip/fedgfe/2005-16.html
Alraheb, T., Nicolas, C., & Tarazi, A. (2017). Institutional Environment and Bank Capital Ratios. Working Paper, 1‐47. Retrieved from https://ideas.repec.org/p/hal/wpaper/hal-01475923.html
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297. Retrieved from https://academic.oup.com/restud/article-abstract/58/2/277/1563354
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/030440769401642D
Ansari Samani, H., Eisavi, M., & Amoozad Khalili, H. (2021). Optimal Capital Adequacy Ratio in an Islamic Banking System. International Journal of Business and Development Studies, 13(2), 27-46. Retrieved from https://ijbds.usb.ac.ir/article_6749.html
Baltagi, B. H., Song, S. H., & Jung, B. C. (2001). The unbalanced nested error component regression model. Journal of Econometrics, 101, 357–381. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0304407600000890
Baltagi, B. H., Bresson, G., & Pirotte, A. (2005a). Adaptive estimation of heteroskedastic error component models. Econometric Reviews, 24, 39–58. Retrieved from https://www.researchgate.net/publication/227352930_Adaptive_estimation_of_heteroskedastic_error_component_models?_share=1
Baum, C.F., Caglayan, M., & Ozkan, N. (2005). The Second Moment Matter the Response of Bank Lending Behavior to Macroeconomic Uncertainty. www.gla.ac.uk/media/media_22217_en.pdf. https://ideas.repec.org/p/gla/glaewp/2005_27.html
Bernanke, S., & Blindar, A. (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, P82. Retrieved from https://pages.stern.nyu.edu/~dbackus/Identification/BernankeBlinder_AER_92.pdf
Bernanke, S., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, P9. Retrieved from https://www.nber.org/system/files/working_papers/w5146/w5146.pdf
Boyd, J. H., Smith, B. D., & Levine, R. (2001). The Impact of Inflation on Financial Sector Performance. Journal of Monetary Economics, 47(2), 221-248. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0304393201000496
Boubakri, N., Mirzaei, A., & Saad, M. (2023). Bank lending during the COVID-19 pandemic: A comparison of Islamic and conventional banks. Journal of International Financial Markets, Institutions & Money, 84, 101743. Retrieved from https://www.sciencedirect.com/science/article/pii/S1042443123000112
Bound, J., Jaeger, D. A., & Baker, R. M. (1995). Problems with instrumental variables estimation when the correlation between the instruments and the endogenous explanatory variable is weak. Journal of the American Statistical Association, 90(430), 443–450. Retrieved from https://www.jstor.org/stable/2291055
Dogan, E., Altinoz, B., & Tzeremes, P. (2020a). The analysis of ‘Financial Resource Curse hypothesis for developed countries: evidence from asymmetric effects with quantile regression. Resource Policy, 68, 101773. Retrieved from https://ideas.repec.org/a/eee/jrpoli/v68y2020ics0301420720301574.html
 
Elfeituri, H. (2022). Banking stability, institutional quality, market concentration, competition and political conflict in MENA. Journal of International Financial Markets, Institutions and Money, 76, 101476. Retrieved from https://ideas.repec.org/a/eee/intfin/v76y2022ics1042443121001827.html
Fawad, A., & Taqadus, B. (2013). Explanatory Power of Macroeconomic Variables as Determinants of Non-Performing Loans: Evidence from Pakistan. World Applied Sciences Journal, 22(2), 243-255. Retrieved from https://www.scirp.org/reference/referencespapers?referenceid=3129790
Filardo, A. J., & Siklos, P. L. (2020). The cross-border credit channel and lending standards surveys. Journal of International Financial Markets, Institutions and Money, 67, 101206. Retrieved from https://www.bis.org/publ/work723.pdf
Heidari, H., & Dadashzadehrishekani, P. (2022). Investigating the Effects of Selected Macroeconomic Variables on Istanbul Stock Market Return through Applying Markov Regime Switching Model. Iranian Economic Review, 26(4), 783-790. doi: 10.22059/ier.2022.90655. Retrieved from https://ier.ut.ac.ir/article_90655.html
Hsiao, C. (1986). Analysis of Panel Data. Cambridge: Cambridge University Press. Retrieved from https://assets.cambridge.org/052181/8559/sample/0521818559WS.pdf
Islam, N. (1995). Growth empirics: A panel data approach. Quarterly Journal of Economics, 110, 1127–1170. Retrieved from https://www.jstor.org/stable/2946651
Issavi, M., Tari, F., Ansari Samani, H., & Amozad Khalili, H. (2018). Investigate the Functional Appropriateness of Capital Ratios in Iranian Banks. Financial Management Perspective, 8(21), 95-113. Retrieved from https://jfmp.sbu.ac.ir/article_95382.html
Latif, A., Zaharum, Z., Nasrul, Z., Noh, F., & Md Isa, M. (2019). Factors influencing commercial banks' lending behaviour in Malaysia. Advanced International Journal of Banking, Accounting and Finance, 1, 48–58. Retrieved from https://www.researchgate.net/publication/338038132_Factors_Influencing_Commercial_Banks'_Lending_Behaviour_in_Malaysia
Le, H. N. Q., Nguyen, T. V. H., & Schinckus, C. (2022). Bank lending behavior and macroeconomic factors: A study from a strategic interaction perspective. Heliyon, 8, e11906. Retrieved from https://www.sciencedirect.com/science/article/pii/S2405844022031942
Maurin, L., & Toivanen, M. (2015). Risk, capital buffers and bank lending: The adjustment of euro area banks. Journal of Banking and Financial Economics, 17, 113‐129. Retrieved from https://press.wz.uw.edu.pl/jbfe/vol2015/iss3/5/
 
Matousek, S., & Sarantis, N. (2009). The bank lending channel and monetary transmission in Central and Eastern European countries. Journal of Comparative Economics, 37, 321-334. Retrieved from https://ideas.repec.org/a/eee/jcecon/v37y2009i2p321-334.html
Manamba, E. (2014). An empirical analysis of interest rate spreads in Tanzania. Asian Journal of Research in Banking and Finance, 4(10), 244-269. Retrieved from https://www.researchgate.net/publication/280965650_An_Empirical_Analysis_of_Interest_Rate_Spreads_in_Tanzania
Matemilola, B. T., Bany-Ariffin, A. N., & Muhtar, F. E. (2015). The impact of monetary policy on bank lending rate in South Africa. Borsa Istanbul Review, 15(1), 53-59. Retrieved from https://www.sciencedirect.com/science/article/pii/S2214845014000404
Nguyen, C. P., Le, T.-H., & Su, T. D. (2020). Economic policy uncertainty and credit growth: Evidence from a global sample. Research in International Business and Finance, 51, Article 101118. Retrieved from https://ideas.repec.org/a/eee/riibaf/v51y2020ics0275531919302326.html
Ofori-Sasu, D. (2023). Lending behavior, political environment and systemic banking crisis in developing economies. Scientific African, 22, e01928. Retrieved from https://www.sciencedirect.com/science/article/pii/S2468227623003836
Roodman, D. (2009). How to Do xtabond2: An Introduction to Difference and System GMM in Stata. The Stata Journal, 9(1), 86–136. Retrieved from https://ideas.repec.org/a/tsj/stataj/v9y2009i1p86-136.html
Roulet, C. (2018). Basel III: Effects of capital and liquidity regulations on European bank lending. Journal of Economics and Business, 95, 26–46. Retrieved from https://ideas.repec.org/a/eee/jebusi/v95y2018icp26-46.html
Sashana, W. (2012). The Impact of Macroeconomic Uncertainty on Bank Lending Behavior in Jamaica. Research Services Department, Research and Economic Programming Division Bank of Jamaica. Retrieved from https://boj.org.jm/uploads/pdf/papers_pamphlets/papers_pamphlets_The_Impact_of_Macroeconomic_Uncertainty_on_Bank_Lending_Behaviour_in_Jamaica.pdf
Sanfilippo-Azofra, S., Torre-Olmo, B., Cantero-Saiz, M., & López-Gutiérrez, C. (2018). Financial development and the bank lending channel in developing countries. Journal of Macroeconomics, 55, 215-234. Retrieved from https://ideas.repec.org/a/eee/jmacro/v55y2018icp215-234.html
Talavera, O., Tsapin, A., & Zholud. (2006). Macroeconomic Uncertainty and Bank Lending: The Case of Ukraine. German Institute for Economic Research Discussion Paper Series, P637. Retrieved from https://ideas.repec.org/p/diw/diwwpp/dp637.html
Vo, X. V., & Nguyen, P. C. (2014). Monetary policy and bank credit risk in Vietnam pre and post the global financial crisis. Risk management post financial crisis: A period of monetary easing, 96, 277-290. Retrieved from https://ideas.repec.org/h/eme/csefzz/s1569-375920140000096011.html
Vo, X. V. (2018). Bank lending behavior in emerging markets. Finance Research Letters, 27, 129-134. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S1544612317306232
Iranian Economic Review
Volume 29, Issue 3 - Serial Number 3
September 2025
Pages 1137-1162

Files

Share

How to cite

Statistics