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The Role of Liquidity Creation in Managing the COVID-19 Banking Crisis in Selected Mena Countries

Author

Listed:
  • Hani El-Chaarani

    (Faculty of Business Administration, Beirut Arab University, Tripoli Campus, Riad El Solh, Beirut P.O. Box 1150-20, Lebanon)

  • Rebecca Abraham

    (Huizenga College of Business, Nova Southeastern University, 3301 College Ave., Fort Lauderdale, FL 33314, USA)

  • Georges Azzi

    (Business School, Holy Spirit University of Kaslik, Jounieh P.O. Box 446, Lebanon)

Abstract

Banks are financial intermediaries who transform deposits into loans. Banks in the MENA (Middle East and North Africa) region use large deposits from oil companies and big businesses to finance trade, and fund government and private sector infrastructure projects. The role of banks in financing trade and development is significant as undeveloped capital markets are unable to perform this function. During the COVID-19 crisis, banks sustained liquidity shocks, as deposits were withdrawn to meet personal and business needs. Essentially, banks could not make loans, as the funds to make loans were depleted. The purpose of this study is to evaluate the effectiveness of liquidity creation as a main force, in conjunction with other performance predictors such as efficient asset management, asset quality, and bank size, on bank financial performance, either individually or in conjunction with liquidity creation during the COVID-19 financial crisis. We used bank financial data from a sample of 298 banks from 11 countries in the MENA region, including Egypt, Tunisia, Morocco, Qatar, Bahrain, Oman, Kuwait, Saudi Arabia, United Arab Emirates, Jordan, and Israel, from 2020 to2021. Liquidity creation, efficient asset management, asset quality, and bank size increased bank return on assets and return on equity. Bank size and asset quality acted jointly with liquidity creation to increase return on assets and increase return on equity. We conclude that as liquidity creation acts individually, and in conjunction with asset quality and bank size to increase bank profits, both its main effect and its moderated effect, can maintain bank profitability, during periods of extreme liquidity supply shocks, such as the COVID-19 crisis.

Suggested Citation

  • Hani El-Chaarani & Rebecca Abraham & Georges Azzi, 2023. "The Role of Liquidity Creation in Managing the COVID-19 Banking Crisis in Selected Mena Countries," IJFS, MDPI, vol. 11(1), pages 1-16, February.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:1:p:39-:d:1079955
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    References listed on IDEAS

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    3. Michael Adusei, 2015. "The impact of bank size and funding risk on bank stability," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1111489-111, December.
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