Probability of default and political instability in the MENA region
ISSN: 0307-4358
Article publication date: 1 June 2023
Issue publication date: 21 February 2024
Abstract
Purpose
This study aims to empirically investigate the impact of political instability on the banking stability of the dual banking system in the Middle East and North African (MENA) countries.
Design/methodology/approach
The study measures banking stability with probability of default (PD) and Zscore by employing the generalised method of moment (GMM) between 2007 and 2021 on the dual banking system in the region. The authors further estimate short-long-run situations coupled with a robustness test using a generalised least square (GLS) model.
Findings
The authors' findings indicate that institutional factors of political stability, crisis period, high-crisis countries, law and order and macroeconomic indicators influence the two types of banking stability in the region. The authors found the consistency of the factors explaining stability in the region in both short-and long-run situations. Consequently, the study also reveals the adverse effects of crisis periods and high-crisis countries on banking stability.
Practical implications
The results of this study explicitly identify the critical need for sustaining political stability and abiding by laws and order to achieve dual banking stability in the region. Therefore, policymakers may consider allowing the region's banks to operate beyond retail banking since diversification enhances banking stability.
Originality/value
The authors' study balances by employing dual stability measurement in predicting the impact of political instability, law and order and other indicators on the MENA region's two banking models. This study uncovers the effect of the global crisis period on banking stability and high-crisis countries in the region and verifies the models' robustness.
Keywords
Acknowledgements
This paper forms part of a special section “International Financial Ecosystem and Islamic Firms”, guest edited by Kabir Hassan and Mamunur Rashid.
Citation
Aliyu, S., Mohammad, A.R. and Wahab, N.A. (2024), "Probability of default and political instability in the MENA region", Managerial Finance, Vol. 50 No. 3, pp. 473-497. https://doi.org/10.1108/MF-09-2022-0410
Publisher
:Emerald Publishing Limited
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