Do political connections affect banks' leverage? Evidence from some Middle Eastern and North African countries

This study examines the association between political patronage and banks' financing decision in a sample of 34 commercial banks operating in Middle East and North Africa region for the period 2003-2014. Linear and nonlinear Panel Data analysis is used to investigate this relationship. The results reveal that politically backed banks tend to be more leveraged. Additionally, the indirect effect of political patronage on leverage is found to be not so large but significant through interaction with profitability, that is, politically backed banks with higher profitability are positively associated with leverage. Our findings imply that the privileges resulting from political ties in terms of market power and easier access to financing sources make banks more profitable and this also leads to higher leverage. In line with the related literature, a strong political presence in the board of banks can be considered as an important intangible asset enabling banks to draw more direct rents from the government which would not otherwise be available; also, as one of the factors driving bank financing decisions.