Bank lending amid geopolitical risk: The GCC case

Bayu Arie Fianto and Mansor H. Ibrahim

Review of Financial Economics, 2025, vol. 43, issue 4, 608-628

Abstract: This study investigates whether local and global geopolitical risks depress credit growth in GCC banks and whether the effect is heterogeneous across banks of different types (Islamic and Conventional), sizes, capital ratios, and liquidity ratios. Using an unbalanced panel dataset of 64 banks over the period 1990–2023, a total of 1967 bank‐year observations, and the local projections method, we find that in general, credit growth declines following the increase in global and local geopolitical risks. Interestingly, the drop in credit growth tends to be larger when facing heightened global geopolitical risk. Looking at the heterogeneous effect of geopolitical risk across bank‐specific characteristics, we find that Islamic banks remain resilient to global risk but are vulnerable to local risks. We also note that local geopolitical risk tends to exert a more persistent impact on smaller and less liquid banks. These results suggest the need for (i) further development of Islamic banking to shield GCC's banking sector from global geopolitical uncertainty, (ii) building banks' balance‐sheet strength vis‐à‐vis bank assets and liquidity ratio, and (iii) preserving regional stability to mitigate regional tensions and conflicts.

Date: 2025
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https://doi.org/10.1002/rfe.70017

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:43:y:2025:i:4:p:608-628

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