Quo Vadis Credit Growth in the MENA Region?

This blog examines the recent credit slowdown among Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth is likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals—capitalization and loan quality—helped to explain differences in credit growth across banks and countries. The blog concludes on what policy measures can be taken to revive credit growth in the MENA region.


As in other regions in the world, bank credit in the MENA region has recently experienced a marked turnaround. After accelerating to peak real annual growth rates ranging from about 20 percent (Lebanon) to almost 100 percent (Sudan) before the global crisis, credit has decelerated sharply, by an average of nearly 30 percentage points, with several countries experiencing declines of more than 40 percentage points (Figure 1). Continued sluggishness of bank credit can have serious consequences for economic activity. To the extent that credit is constrained on the supply side, sectors, firms, and households that are particularly dependent on bank financing are either forced to scale back their consumption and investment plans or resort to alternative sources of funding, thus creating a drag on the economic recovery. In the longer run, slow credit growth will delay financial deepening, in turn limiting the growth potential of the economy. Furthermore, for oil exporting countries, spending cutbacks tend to fall disproportionately on the non-oil private sector, for which alternative sources of funding are scarce, thereby inhibiting the process of economic diversification. Therefore, MENA policymakers are justifiably concerned regarding the causes of the credit slowdown and what actions they might take to spur a recovery in credit.


Recent Literature on Credit Slowdowns

Of course, these recent slowdowns have not been limited to the MENA region. In a worldwide study of credit growth, Aisen and Franken (2010) report that 95 percent of the 80 countries in their sample experienced a contraction in real terms in at least one month following the Lehman Brothers bankruptcy in September 2008. Their study then uncovers several determinants of credit growth during this period; in particular, the occurrence of a prior credit boom is associated with lower credit growth, as is a decline in GDP growth of trading partners. It also finds that structural conditions, such as the degree of financial depth and integration are relevant predictors of credit growth, and that conventional countercyclical monetary policy—reductions in policy rates—have been effective in dampening the credit decline. Similarly, Cihak and Koeva Brooks (2009) focus on recent sluggish credit growth in the Euro Area, and find that bank soundness—as measured by banks’ distance to default—is significantly linked to bank-level supply of credit. Using an Instrumental Variable approach, their analysis also shows that credit growth in turn has an impact on economic activity.

Other studies have also explored adverse consequences of declining credit growth. Abiad, Dell’Ariccia, and Li (2010) investigate recoveries from recessions, and find that roughly one-fifth of them are “creditless”, in the sense that real credit growth is zero or negative in the first three years of the recovery. Creditless recoveries are more likely to occur following a credit boom and/or a banking crisis, and compared to recoveries with more “normal” credit growth, they tend to be substantially weaker. Kannan (2010), on the other hand, concentrates on the aftermath of financial crises, where impaired credit conditions are also linked to a weaker economic recovery. Espinoza and Prasad (2010) find that the cumulative effect of macroeconomic shocks on NPLs in the GCC could be quite large.


Given these documented links between credit conditions and economic activity, we explore the recent decline in credit growth in the MENA region, so as to better understand its causes and suggest avenues for policy (Barajas et al, 2010). While the Aisen and Franken (2010) study makes significant progress in this regard, it includes only six MENA countries in its sample,[1] and does not incorporate a measure of quantitative or unconventional monetary policy, which in some cases may have had an even greater impact on credit growth than movements in policy interest rates. In order to take full advantage of the data available for the twenty countries in the sample, we look at recent credit growth in MENA from three different analytical angles.

First, we uncover the frequency of credit booms and busts across different regions. The methodology used, common in the academic literature,[2] identifies credit booms as episodes during which credit is not only growing at a high rate, but also is surpassing its long-run trend by a “large enough” amount. Our findings show that, as expected, the credit boom experienced by many MENA countries in the run-up to the financial crisis has not been that unique compared to other regions. In fact, over the past 25 years, credit booms have arisen in MENA countries at a frequency similar to that of other regions. Moreover, the historical pattern of credit surrounding booms in MENA suggests that the subsequent sharp credit slowdown is likely to be followed by a protracted recovery (Figure 2).


Second, we conduct a decomposition of banks’ balance sheets in the pre- and post-crisis periods, in line with the approach followed in the Barajas and Steiner (2002) study of credit stagnation in Latin America in the late 1990s. The main result of the balance sheet decomposition for the MENA region during the current credit cycle is the dominant role played by deposits and capital, a marked slowdown of which severely constrained banks’ ability to lend. This was true for most countries, and this effect was often exacerbated by difficulties to obtain external financing. On the other hand, there is also evidence that fiscal and monetary policy—through quantitative means—served to dampen the slowdown in many countries.

Third, to complement the macro-level analysis we delve deeper into the bank balance sheets of the financial institutions in the MENA region to uncover several key determinants of bank lending growth, both on the supply and demand side, offering clues as to what pre-conditions need to be in place for a revival of credit. Bank level panel data regressions for a subset of eleven MENA countries confirm some findings from the balance sheet decomposition (Figure 3). On the supply side, we find that deposit growth is the significant driver, followed by capitalization. Increasing loan loss provisions—indirectly reflecting worsening loan quality—can be expected to slow lending growth. Lending growth is also associated with higher overall costs, in response to which banks maintain higher interest margins. Similarly, favorable macroeconomic conditions, reflecting both supply and demand factors, are found to spur bank lending. Real GDP growth, and oil prices—in oil-exporting countries only, however— are associated with stronger lending activity.


Thus, the causes for the sharp credit slowdown have—by differing degrees—spanned both demand and supply-side factors. On the supply side, banks were subjected to two types of shocks: (1) an intense cutback in funding, as domestic deposit growth slowed sharply (in Qatar, for example, deposits declined in nominal terms from mid-2008 to end-2009) and, in some cases, external borrowing for banks was curtailed (in particular, in Kuwait from mid-2008 to end-2009); and (2) increased strains on their balance sheets, as profitability fell and nonperforming loans rose. On the other hand, the economic downturn depressed credit demand and raised uncertainty about future investment prospects, thus heightening risk aversion among both banks and prospective borrowers. Finally, as a result of shocks specific to the region—the failure of Saudi conglomerates, the Dubai crisis, and the difficulties surrounding investment companies in Kuwait—the credit culture may be undergoing a shift away from name lending toward an approach based on accurate disclosure and appropriate risk management.

What are the policy implications of the study?

Reviving credit will necessarily take time. Even as economic activity recovers—thereby lifting credit demand and reducing the uncertainty that may be weighing on banks’ willingness to lend—credit recovery may lag, as past experiences from the analysis on the frequency on credit booms and busts indicate. Specifically, a protracted stagnation in credit can last up to three years before a recovery is evident.

However, the analysis also shows that certain quantitative policies—by the central bank and by the government, to restore part of the lost funds to the banking system—have been effective during the credit slowdown, helping to dampen what could have been even more serious contractions in credit growth. To the extent possible, these policies should be maintained in order to avoid a further retrenchment in lending. The bank-level panel data study suggests that a revival of credit growth will require two interrelated conditions: bank balance sheets must improve, and the macroeconomic recovery, which in turn influences deposit growth, must take hold.

As risk aversion may be affecting supply and/or demand for credit, there is also scope for policy actions to temper it and thus contribute to a more rapid recovery in credit. Policymakers can remove some of the regulatory uncertainty, particularly after introducing extraordinary measures in addition to the injection of funds, such as increases in capital and provisioning requirements, as well as blanket deposit guarantees. Toward the medium-term, developing local debt markets will be crucial in order to expand the financing options for the corporate sector, provide a key benchmark for pricing financial instruments in the economy, and reduce the current high reliance on the banking system in this region.[3] While pronounced bank credit cycles may be difficult to avoid in their entirety, their impact on economic activity might be lessened with a more diversified financial system.

The views expressed in this article are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. Any errors and omissions are the sole responsibility of the authors. 


Abiad, Abdul, Giovanni Dell’Ariccia, and Bin Li, 2010, “Creditless Recoveries,” (unpublished: International Monetary Fund).

Aisen, Ari and Michael Franken, 2010, “Bank Credit During the 2008 Financial Crisis: A Cross-Country Comparison,” IMF Working Paper 10/47.

Barajas, Adolfo, Ralph Chami, Raphael Espinoza, and Heiko Hesse, 2010, “Recent Credit Stagnation in the MENA Region: What to Expect? What Can Be Done?,” IMF Working Paper 10/219 (Washington: International Monetary Fund).

Barajas, Adolfo, Giovanni Dell’Ariccia, and Andrei Levchenko, 2007, “Credit Booms: The Good, the Bad, and the Ugly,” (unpublished: International Monetary Fund).

Barajas, Adolfo and Roberto Steiner, 2002, “Why Don’t They Lend? Credit Stagnation in Latin America,” Staff Papers, International Monetary Fund, Vol. 49, pp. 156–184.

Basher, Syed, Ismail Dalla, and Heiko Hesse, 2010, “Gulf Cooperation Council local currency bond markets and lessons from East Asia,” VOX Column (May 22, 2010). Available via the Internet.

Cihak, Martin and Petya Koeva Brooks, 2009, “From Subprime Loans to Subprime Growth? Evidence for the Euro Area,” IMF Working Paper 09/69 (Washington: International Monetary Fund).

Espinoza, Raphael and Ananthakrishnan Prasad, 2010, “Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects,” IMF Working Paper 10/224 (Washington: International Monetary Fund).

Gourinchas, Pierre-Olivier, Rodrigo Valdés, and Oscar Landerretche, 2001, “Lending Booms: Latin America and the World,” Economía, Vol.1, No. 2, pp. 47–99.

Kannan, Prakash, 2010, “Credit Conditions and Recoveries from Recessions Associated with Financial Crises,” IMF Working Paper 10/83 (Washington: International Monetary Fund).

Mendoza, Enrique and Marco Terrones, 2008, “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data,” IMF Working Paper 08/226 (Washington: International Monetary Fund).

[1] Egypt, Jordan, Morocco, Saudi Arabia, Sudan, and Tunisia.   

[2] Gourinchas, Valdés, and Landerretche (2001); Mendoza and Terrones (2004); and Barajas, Dell’Ariccia, and Levchenko (2007).
[3] Basher, Dalla and Hesse (2010) examine the prospects and importance of local currency bond markets in the GCC.   

Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE.