The Determinants and Policy Implications of Off-Balance Sheet Activities in MENA Countries Commercial Banks
Economic Research Forum
33 Pages Posted: 18 Oct 2010
Date Written: October 10, 2010
Although there is literature about off-balance sheet (OBS) activities in banking system, this is the first paper that investigates the off-balance sheet activities in MENA banking industry. It aims to test the tax regulatory hypothesis and market discipline hypothesis in determining OBS activities of MENA commercial banks using panel data set during the period of 1996-2007. We employ Mansfield’s (1961) logistic diffusion model and we consider OBS activities as real financial innovation following a time trend diffusion curve. The model is modified to include regulatory and non-regulatory bank-specific factors in addition to macroeconomic factors. We also, added country dummy vector to incorporate country’s institutional and financial environment and time dummy vector to control for the political and economic events over time. The results reveal that OBS activities do not follow Mansfield financial diffusion model, and the adoption is decreasing over time. Regulatory tax hypothesis is rejected for the case of MENA banks since most of them face high regulatory pressure which negatively affects the OBS adoption. The results also suggest that OBS activities follow the business cycle notion and the usage decision depends on economic conditions. Moreover, there exists an informational economy of scope between loans and OBS activities. Banks will participate more in OBS activities to reduce their risk resulting from loans. Also, OBS activities are profit driven. Political and economic events negatively affect the MENA banks OBS activities. The implications of these results suggest that regulations, institutional, and technological deficiency in MENA countries prevent the banking system from adopting different financial innovations.
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