Credit to the private sector in dual banking countries: does the presence of state-owned and foreign banks have any role?

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This study extends the bank ownership database of Claessens and van Horen (2015) to investigate the role of state-owned and foreign banks in the development of private credit markets in countries with a dual banking system. The enhanced database contains state and foreign ownership information of 1,038 banks operating in 29 countries, categorised as either Islamic or non-Islamic. To begin, this study uses the database to identify the bank ownership patterns in the dual banking countries. The data reveals that the ownership structure of the Islamic banking industry changes in a different manner from that of their conventional counterpart. More specifically, it shows that, in line with financial liberalisation policies, the presence of state-owned and foreign conventional banks decreases and increases, respectively. On contrary, Islamic banks with both types of ownership become more prevalent over time. Further, the data is used to examine how state-owned and foreign bank presence affects private credit in the countries. To do so, this study employs a cross-country approach that regresses private credit to GDP ratios against the shares of total bank assets held by state-owned and foreign banks. In the regressions, the asset shares are measured both in total and by bank types (i.e., Islamic versus conventional banks). The regressions are run separately using data average over the full sample period (1995-2017), and over the three subsample periods that are divided into the pre-crisis (1995-2006), during-crisis (2007-2009), and post-crisis (2010-2017) periods. When measuring bank ownership shares in total, this study finds that the presence of state-owned banks is associated with less credit to the private sector in support of the political view. This negative relationship is, however, found to be insignificant during the crisis period. In terms of magnitude, the effect, when significant, is somewhat larger in the post-crisis period than in the pre-crisis and the full sample period. On the other hand, this study does not find significant evidence that the presence of foreign banks could adversely affect private credit markets either in the full sample period or in the subsample periods.
Bank ownership , Dual banking system , Islamic banks , Conventional banks
Noordin, N. Z. (2021). Credit to the private sector in dual banking countries: does the presence of state-owned and foreign banks have any role? (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from

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