Corruption, Funding Structure and Bank Lending of Dual Banking System

The main objective of this paper is to examine the interaction effect of political turmoil on the relationship between funding structure and bank lending behaviour of Islamic (IBs) and Conventional banks (CBs). Political turmoil is measured by corruption (CPI) and election year (ELY) while the funding structure is measured by Total Customer Deposits (TCD) and Total Bank Deposits (TBD). We conducted a panel analysis of Islamic and conventional banks to ascertain whether the funding structure of Islamic banks can sustain financing supply and whether its growth is higher than conventional bank lending growth in times of political turmoil. Using the matched-pair technique, this study utilizes a panel sample of 58 Islamic banks and 58 conventional banks from 18 dual-banking countries from 2006 to 2017. The generalised Method of Moments (GMM) is used to deal with the endogeneity and heterogeneity issues. We observed that corruption and elections affect the amount of lending/financing given to IBs and CBs. The study found that TCD hinders the growth of credit supply for both IBs and CBs during elections. Nevertheless, TBD did not have any influence on bank lending. The study on interaction reveals that political turmoil has affected the relationship between funding structure and bank lending for Islamic and conventional banks. These findings contribute to supporting the Islamic banking system's involvement in financial and economic stability. This suggests that corruption is influencing the funding structure within the banking system, which in turn affects the availability of credit from banks. Future research could investigate whether the governance by the bank’s management leads to credit supply efficiency.