Basel Accord and Lending Behavior: Evidence from MENA Region

In 1988, an agreement was reached in Basel to set common requirements of bank capital in order to promote the soundness and stability of the international banking system. In line with the agreement, banks were required to hold capital in proportion to their perceived credit risks, which may have caused a “credit crunch,” and a significant reduction in credit supply. We investigate the direct link between the implementation of the Basel Accord and lending activities using a data set of annual observations from 1989 to 2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia. The results provide support evidence of a significant increase in credit growth following the implementation of capital regulations in general. Despite the higher capital adequacy ratio, banks expanded credit and assets. Credit growth appears to be driven by demand fluctuations attributed to real growth, cost of borrowing and exchange rate risk. Overall, the effects of macroeconomic variables, in contrast to capital adequacy, appear to be more dominant in determining credit growth, regardless of the capital adequacy ratio, and variation across banks by nationality, ownership, and listing.