Does ownership concentration affect banks’ credit risk? Evidence from MENA emerging markets

Abstract

AbstractThe purpose of this study is to explore the impact of ownership concentration on banks’ credit risk. The study employs a dynamic panel approach using data from 98 banks listed in the 10 Middle East and North African (MENA) emerging stock markets between 2003 and 2016. To better understand the nature of the relationship between ownership concentration and bank credit risk and how this relationship is shaped by the recent financial crisis, we conducted a pre‐ and postcrisis analysis. Our findings document a positive relationship between ownership concentration and nonperforming loans in the precrisis period, which surprisingly reverses during the postcrisis period. We argue that the reversal of this relationship is driven by changes in controlling shareholders’ risk aversion, behavior, and attitude prompted by the financial crisis. Given that central banks are entrusted with forestalling banks’ failure, incorporating ownership concentration, as a fundamental determinant of banks’ credit risk, is crucial to anticipate future financial calamities. Our findings highlight the gravity of agency problems in emerging MENA markets. Reinforcing firm‐level as well as country‐level governance mechanisms is crucial to restore a sound banking system, enhance markets’ integrity, and increase investors’ confidence.