Measuring and Analyzing the Impact of Financial Crowding Out on the Iraqi Banking Sector for the Period From 2004 to 2020

Abstract

Purpose: The objective of this study was to investigate the effect of financial crowding out on the banking sector, tested under the mediation of the two variables of banking sector indicators (total deposits ,Bank credit). Theoretical Framework: Although the studies conducted to clarify the effects of fiscal crowding-out were conducted in the context of public finances, there was a need to explore the effect of mediating interest rates as a result of increasing public debt to finance government spending. Design/Methodology/Approach: We used the methodologies of Ali Jaber and Hoda Abed (2003) to test the effect of financial policy variables to measure the size of the financial crowding out variable. Regarding the testing and validity of the hypothetical search model, path analysis was used within the structural equation modeling analysis. The study sample consists of 16 commercial and Islamic banks in the Iraqi banking sector, and it is inclusive of all the data of the banks listed in the Iraq Stock Exchange, for the possibility of generalizing the results fairly to the community. Findings: The results indicate that the variables of total taxes, public debt, and total public expenditures as indicators of the volume of financial competition have a direct impact on total bank deposits and credit. Such an effect is statistically significant. The results provide practical solutions to enhance competition in the funds available for lending to the banking sector by diversifying the various funding sources to preserve and sustain banking resources. Research, Practical and Social Implications: Future studies can look at other indicators of the size of financial competition and assess its impact on the various dimensions of the relationship between the financial policy methodology and banking sector facilities. Implications/Originality/Value: This study contributes to the literature related to fiscal policy by analyzing the results of the impact of government spending financing equations on total deposits and the volume of bank credit in Iraqi banks, and presents a practical and applied perception of the role played by the fiscal policy methodology in Iraq.