Corruption, lending and bank performance

Abstract

This paper uses a sample of 7235 banks from 160 countries between 2000 and 2016 to investigate the link between corruption, lending and bank performance. It considers both country- and bank-level corruption. The study finds that while corruption increases bank lending, it has an adverse impact on bank profits and risks (credit, solvency and distance to default). Corporate lending is found to be most influenced by corruption. Bank-level corruption influences bank performance in both developed and developing countries whereas country-level corruption has a lesser effect on lending in developing countries. The study also finds that greater bank competition, market concentration and improved regulatory environments reduce the effect of corruption on bank lending and performance. Policy makers should focus on enhancing regulatory rules and institutions in order to deal with the adverse impact of corruption on bank performance.