The spillover effect of government spending on banking performance in Kuwait

Abstract EN

Purpose : this study explores the relationship between government intervention and bank profitability by analyzing the determinants of bank performance.

The study contributes empirical evidence regarding some main aspects that affect banking performance in Kuwait by investigating bank specific characteristics, macroeconomic factors, and government intervention.

In addition, the study examines the failure of government intervention in the banking system of Kuwait.

Further, the empirical model used in this paper shows the impact of the financial crisis on the banking sector in Kuwait.

Study design/ methodology/ approach: The study uses panel techniques to estimate the regression models through applying pooled OLS, fixed effect, and random effect.

In addition, the Hausman test is used in order to choose the appropriate estimated model between fixed effects and random effects.

The long run relationship among the estimated variables is also examined through two panel cointegration tests: panel cointegration test of Pedroni and Kao test for cointegration.

Sample and data: The yearly data set covers seven commercial banks from 1993 to 2017.

These are National Bank of Kuwait (NBK), Kuwait Finance House (KFH), Gulf Bank (GB), Al-Ahli Bank of Kuwait (ABK), Kuwait International Bank (KIB), Commercial Bank of Kuwait (CBK), and Burgan Bank (BB).

The Central Bank of Kuwait regulations require commercial banks in Kuwait to practice their banking operations in accordance with a conventional banking system, or Islamic Sharee’a compliant system.

To capture such differences, the sample used includes both Islamic and non-Islamic banks.

Results: Findings show that government spending in the Kuwaiti economy deteriorates the performance of the banking system.

This suggests that massive government spending tends to crowd out the role of the private sector in the economy through limiting credit channels to the banking industry.

Furthermore, they show that the effect of the financial crisis on the banking performance was only pronounced during 2008 and 2009, whereas the effect progressively disappeared after the year 2009, highlighting the strength of banking industry to prevent global financial panic.

Originality value : this paper explores the relationship between government intervention and bank profitability by analyzing the determinants of bank performance.

Previous studies have not explored the important aspects that affect bank profitability in Kuwait.

Therefore, this study delivers empirical evidence regarding some main aspects that affect banking performance in Kuwait by investigating bank specific characteristics, macroeconomic factors, and government intervention.

In addition, the study highlights the failure of government intervention in the banking system of Kuwait, which supports the nature of the "Keynesian revolution".

Research limitations / implications : the effect of government intervention on banking profitability should be further investigated.

The effect of public spending on banking depends on looking at the credit details of each bank’s balance sheets.

This includes the disaggregation of corporate loan types to investigate how each type of credit is affected by massive government spending.

It is also suggested that government spending data should also exclude any spending on non-tradable goods.

This is because the Kuwaiti government usually spends more on non-tradable goods than the private sector, especially in education and health.

These questions should guide future investigations.