Abstract
The paper examines the impact of corruption on the soundness of banking systems in middle-income countries. The findings show that corruption exacerbates the soundness of banking systems in those countries. This implies that increased corruption leads to banks more prone to taking risks and a rise in non-performing loans, rendering higher probability of crises. The results from robustness test yields consistent results. In addition, the results of the study show that the bankspecific variables as well as those related to regulations and institutional quality can also affect the health of banking systems in middle-income countries.
Highlights
Many studies have analyzed the corruption effects on the economy in general, but there is limited research of its impacts on financial intermediaries and banks
Our paper explores whether corruption effects on the soundness of banking system in middleincome countries
We find important evidence that the relationship between corruption and ratio of non-performing loans was positive and deteriorates the soundness of the banking system
Summary
Many studies have analyzed the corruption effects on the economy in general, but there is limited research of its impacts on financial intermediaries and banks. Banks act as the lifeblood of an economy, providing the majority of financial resources for the economy, especially in middle-income countries. Studies have shown two possible financial effects of corruption: positive and negative. Khwaja and Mian (2005) argue that companies that are in contact with politicians can get bank loans soon but have a higher default rate; or Charumilind et al (2006) show that firms with close connection with politicians can access long-term bank credit with less collateral requirement, leaving too much risk for banks [2, 3]. Corruption in lending is one of the major causes of problematic loans in many countries
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