The role of political patronage in the risk-taking behaviour of banks in the Middle East and North Africa

Abstract

In light of growing interest in the role of political patronage in banking, several issues are highlighted with regards to the performance and behaviour of politically connected banks that may differ from their non-connected peers. In this article, the effect of political patronage on bank risk-taking is examined ina sample containing 67 banks in several Middle Eastern and North African MENA countries based on a hand collected dataset of political banking connections. Although the study found no evidence that politically connected banks take more risks than their non-politically connected counterparts, which is inconsistent with the moral hazard hypothesis, a nonlinear analysis revealed an indirect effect of political connection. Contrasting results may be related to differences in institutional settings, however, political connections remain an important factor to consider in prudential banking behaviours, either implicitly or explicitly. Overall, this article discusses whether moral hazard is relevant to MENA banks and fills an existing gap in the literature on the MENA region.