Do FDI inflows affect the off-balance sheet activities of banks in GCC economies?

Abdulazeez Y.H. Saif-Alyousfi

19 citations0/0 files storedChina Finance Review International

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Banking stability, regulation, efficiency International Business and FDI Islamic Finance and Banking Studies

Abstract

Purpose This paper investigates and compares the impact of foreign direct investment (FDI) inflows (flow and stock) on bank off-balance sheet (OBS) activities in aggregate as well as at the level of conventional and Islamic banks in GCC countries. It also tests hypotheses of direct and indirect impacts of FDI flow and FDI stock on OBS activities. Design/methodology/approach This paper uses both static and dynamic panel generalized methods of moments (GMM) estimation techniques to analyze the data of 70 GCC banks (45 conventional and 25 Islamic banks) over the period 1995–2017. Findings Empirical results indicate that FDI flow and FDI stock have a significant negative direct impact on OBS activities of GCC banks. The results lend support for the direct channel hypothesis for the effect of FDI on OBS activities and find no evidence in support of the indirect channel hypothesis. OBS activities from conventional banks appear to be more affected than those from Islamic banks. Practical implications The results of this study are expected to trigger appropriate policy response from the central banks of the respective GCC countries as well as their governments. Originality/value It is widely recognized that FDI inflows are of great importance to the economic development of emerging and developing countries. However, their impact on bank OBS activities has so far not been subject to accurate empirical assessment. This paper aims to fill this gap by providing an in-depth quantitative analysis of the impact of FDI flow and FDI stock separately, on bank OBS activities for both conventional and Islamic banks in GCC countries. It distinguishes between direct and indirect channels through which FDI flow and FDI stock may affect OBS activities for banks as a whole and both conventional and Islamic banks separately. It also uses both static and dynamic panel GMM estimation techniques to analyze the data.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1995Another look at the instrumental variable estimation of error-components models 2002Dynamic panel data models: a guide to micro data methods and practice 1999GMM estimation with persistent panel data: an application to production functions 2000GMM Estimation with persistent panel data: an application to production functions 2002Dynamic panel data models: a guide to microdata methods and practice 2013Islamic vs. conventional banks: Business models, efficiency and stability 1997Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking

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