BANKING ON STABILITY: ANALYZING THE CONSEQUENCES OF CORRUPTION ON MENA'S FINANCIAL SECTOR AND ECONOMIC DEVELOPMENT

Abstract

Corruption, defined as the abuse of public or private power for personal gain, has become increasingly pervasive across various sectors of national economies, with a particularly pronounced presence in the banking sector. This phenomenon has attracted extensive attention in both theoretical and empirical studies, which have sought to elucidate the detrimental effects of corruption on the banking sector's performance. This article delves into the impact of corruption on the banking industry, drawing from the findings of numerous cross-sectional regressions conducted by scholars such as Detragiache et al. (2008), Park (2012), Messai and Jouin (2013), and Breuer (2006).

The prevailing body of research consistently demonstrates that corruption exerts a significantly adverse influence on the problem of impaired loans within the banking sector. Park (2012) has gone further to reveal that corruption within this sector extends beyond causing individual bank failures, resulting in widespread destabilization of the entire financial system through the mechanism of contagion. This paper draws insights from the financial crisis of 1997-1998 in East Asia, where corruption played a pivotal role by negatively affecting the balance sheets of banks, particularly in terms of the escalating burden of non-performing loans. A salient illustration of this phenomenon is the case of Hanbo in South Korea, exemplifying how the close nexus between businesses and political entities precipitated a severe deterioration in the quality of bank assets, ultimately culminating in a severe financial crisis.

This study provides a comprehensive exploration of the multifaceted implications of corruption within the banking sector, shedding light on its pervasive and detrimental consequences. By examining the intricate interplay between corruption, impaired loans, and systemic instability, we aim to enhance our understanding of the critical role that corruption plays in shaping the economic landscape of nations. Ultimately, this research underscores the urgency of addressing corruption within the banking sector and implementing robust measures to mitigate its adverse effects.