INFORMATION TECHNOLOGY: AN OPPORTUNITY FOR THE FINANCIAL STABILITY OF TUNISIAN BANKS IN TIMES OF CRISIS

Syrine BEN ROMDHANE; Khaoula KENZARI

Authors

Syrine BEN ROMDHANE University of Tunis, Higher Institute of Management of Tunis, BESTMOD-Lab, Tunisia Author
Khaoula KENZARI University of Tunis El Manar, Faculty of Economics and Management of Tunis, LAPE-Lab, Tunisia Author

Keywords:

Dynamic Panel, Financial Stability, Information Technology, Non-Performing Loans

Abstract

As the financial industry becomes more and more reliant on Information Technology (IT), it is extremely policy-relevant to understand the consequences for financial stability of a more intense use of technology in lending decisions. This study examines the impact of IT investment, and its components, on Tunisian bank stability for the period 2008 to 2018 using the Generalized Method of Moments estimates in first difference and in system of the dynamic model, before, during and after Revolution crisis. The study findings reveal that IT investment has a significant positive relationship with bank stability and a negative relationship with non-performing loans (NPLs). The evidence presented in this paper suggests that investing in IT is likely to be beneficial to financial stability. Therefore, our results indicate that IT-adoption helps banks to select better borrowers and produce more resilient loans. Banks that adopted more IT before the crisis have a significantly lower share of NPLs post-crisis than banks with less IT adoption. Our study further demonstrates that Tunisian banks should devote the largest share of their resources to investing in software and services because by combining such investments with investments in hardware, banks will be less affected by a possible increase of NPLs during and after crisis, and then improve their financial stability.

References

Agoraki, E. K., Delis, M. D., Pasiouras, F. (2011). Regulations, competition and bank risk-taking in transition countries. Journal of Financial Stability. 7: 38-48.

Albuquerque, R., Koskinen, Y., Yang, S., Zhang, C. (2020). Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash. The Review of Corporate Finance Studies, 9(3), November: 593-621, https://doi.org/10.1093/rcfs/cfaa011

Almulla, D., Aljughaiman, A. A. (2021). Does financial technology matter? Evidence from an alternative banking system. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1934978

Arellano, M., Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies. 58(2): 277-297.

Ayadi, F. (2014). The impact of credit risk and information asymmetry on the banking decision. Management Science Journal, 3(267-268): 115-122.

Beccalli, E. (2007). Does IT investment improve bank performance? Evidence from Europe. Journal of Banking and Finance. 31 (7): 2205-2230.

Ben Romdhane, S. (2021). Impact of Information Technologies’ Investments on the Profitability of Tunisian Banks: Panel Data Analysis. Indian Journal of Finance and Banking, 5(2): 44-61.

Ben Romdhane, S. (2013). Impact of Information Technology on the Performance of Tunisian Banks: A Stochastic Frontier Analysis with Panel Data. Asian Academy of Management Journal of Accounting and Finance, 2, 2013.

Ben Romdhane, S., Kenzari, K. (2020). The Determinants of the Volatility of Non-Performing Loans of Tunisian Banks: Revolution versus COVID-19. Review of Economics and Finance, 18: 92-111.

Berg, T., Burg, V., Gombovic, A., Puri, M. (2020). On the Rise of FinTechs: Credit Scoring Using Digital Footprints. The Review of Financial Studies, 33(7), July: 2845-2897, https://doi.org/10.1093/rfs/hhz099

Bhattacharyya, A., Wright, S., Rahman, M. L. (2021). Is better banking performance associated with financial inclusion and mandated CSR expenditure in a developing country? Accounting and Finance, 61(1); 125-161. https://doi.org/10.1111/acfi.12560

Blundell, R., Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics. 87 (1): 115-143.

Boot, A., Hoffmann, P., Laeven, L., Ratnovski, L. (2021). Fintech: what’s old, what’s new? Journal of Financial Stability, 53, 100836.

Buchak, G., Matvos, G., Piskorski, T., Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks. Journal of Financial Economics, 130: 453-483.

Buyl, T., Boone, C., Wade, J. B. (2019). CEO Narcissism, Risk-Taking, and Resilience: An Empirical Analysis in U.S. Commercial Banks. Journal of Management, 45(4), https://doi.org/10.1177/014920631769952

Carletti, E., Oliviero, T., Pagano, M., Pelizzon, L., Subrahmanyam, M. G. (2020). The Covid-19 Shock and Equity Shortfall: Firm-level Evidence from Italy. CSEF Working Paper, 566, Center for Studies in Economics and Finance (CSEF), University of Naples, Italy.

Chen, X., Hu, X., Ben, S. (2021). How do reputation, structure design and FinTech ecosystem affect the net cash inflow of P2P lending platforms? Evidence from China. Electronic Commerce Research, 21: 1055-1082.

Chinoda, T., Kapingura, F. M. (2023). The Impact of Digital Financial Inclusion and Bank Competition on Bank Stability in Sub-Saharan Africa. Economies, 11: 15.

Dell’Ariccia, G., Laeven, L., Suarez, G. (2013). Bank leverage and monetary policies risk-taking channel; evidence from the United States. International Monetary Fund. IMF Working Paper No. 13/143.

Demirgüç-Kunt, A., Detragiache, E. (2002). Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics, 49 (7): 1373-1406.

Di Maggio, M., Yao, V. (2021). Fintech Borrowers: Lax Screening or Cream-Skimming ? Review of Financial Studies, 34(10), October: 4565–4618.

Ding, W., Levine, R., Lin, C., Xie, W. (2021). Corporate immunity to the COVID-19 pandemic. Journal of Financial Economics, 141(2) : 802–830. https://doi.org/ 10.1016/j.jfineco.2021.03.005

Feronika, Kurniawati, H. (2022). Information Technology and Profitability: Empirical Evidence in Indonesia, Jurnal Pendidikan Tambusai, 6(2):8829-8838.

Hu, D., Zhao, S., Yang, F. (2022). Will Fintech development increase commercial banks risk-taking? Evidence from China. Electronic Commerce Research.

Laudon, K.C., Laudon, J.P. (2006). Management of Information System. 9th edition, Eric Fimbel, Pearson Education, France, 638 pages.

Li, X., Cao, J., Liu, J. (2016). An empirical study on the impact of executive compensation on bank risk-taking and performance: Based on the data of listed banks in China. Yuejiang Journal, 8 (01): 39-52, 144-145.

Licht, G., Moch, D. (1999). Innovation and information technology in services. Canadian Journal of Economics, 32(2): 48-61.

Louzis, D. P., Vouldis, A. T., Metaxas, V.L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking and Finance. 1012-1027.

Love, I., Ariss, R. T. (2013). Macro-Financial Linkages in Egypt: A Panel Analysis of Economic Shocks and Loan Portfolio Quality. IMF Working Paper: 01-40.

Makri, V., Tsagkanos, A., Bellas, A. (2014). Determinants of non-performing loans: The case of Euro zone. Pano economicus. 61: 193-206.

Marinč, M., Vlahu, R. (2011). The Economics of Bank Bankruptcy Law, Springer.

Meng, Q., Yang, D. 2021. Does executive excess compensation affect enterprise risk-taking. Friends of accounting, 4: 44-52.

Nwakoby, N. P., Okoye, J. N., Ezejiofor, R. A., Anukwu, C. C., Ihediwa, A. (2020). Electronic Banking and Profitability: Empirical Evidence from Selected Banks in Nigeria. Journal of Economics and Business, 3(2). https://doi.org/10.31014/aior.1992.03.02.227

Pathan, S. (2009). Strong Boards, CEO Power and Bank Risk-Taking. Journal of Banking and Finance. 33: 1340-1350.

Peek, J., Rosengren, E. S. (2000). Collateral damage: Effects of the Japanese bank crisis on real activity in the United States. American Economic Review, 90 (1): 30-45.

Pierri, N., Timmer, Y., (2020). Tech in fin before Fintech: Blessing or curse for financial stability? IMF Working Paper, 20 (14).

Prasad, B., Harker, P.T. (1997). Examining the contribution of information technology toward productivity in US retail banking. Working Paper, Wharton School, University of Pennsylvania.

Radivojević, N., Cvijanović, D., Sekulic, D., Pavlovic, D., Jovic, S., Maksimović, G. (2019). Econometric model of non-performing loans determinants. Physica A 520: 481-488.

Rajan, U., Seru, A., Vig, V. (2015). The failure of models that predict failure: Distance, incentives, and defaults. Journal of Financial Economics, 115 (2): 237-260.

Repullo, R. (2004). Capital requirements, market power, and risk-taking in banking. Journal of Financial Intermediation. 13(2): 156-182.

Rupeika-Apoga, R., Wendt, S. (2021). FinTech in Latvia: Status Quo, Current Developments, and Challenges Ahead. Risks, 9: 181.

Safiullah, M., Paramati, S. R. (2022). The impact of FinTech firms on bank financial stability. Electronic Commerce Research.

Saiful, S., Ayu, D. P. (2019). Risks Management and Bank Performance: the Empirical Evidences from Indonesian Conventional and Islamic Banks. International Journal of Economics and Financial Issues, 9(4): 90-94. https://doi.org/10.32479/ijefi.8078

Sheng, T. (2021). The effect of Fintech on banks’ credit provision to SMEs: Evidence from China. Finance Research Letters, 39, 101558.

Shin, H. S. (2009). Securitisation and Financial Stability. The Economic Journal, 119(536), February: 309-332. https://doi.org/10.1111/j.1468-0297.2008.02239.

Singh, V., Sankhwar, S., Pandey, D. (2015). The role of information communication technology (ICT) in agriculture. Global Journal of Multidisciplinary Studies, 3(4), March, ISSN: - 2348-0459 225.

Skrabic Peric, B., Smiljanic, A. R., Aljinovic, Z. (2018). Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment. North American Journal of Economics and finance. doi.org/10.1016/j.najef.2018.03.009

Skvarciany, V., Jureviciene, D., Morkunas, M. (2019). Determinants of bank profitability: empirical research on Lithuanian market. International Journal of Economic Policy in Emerging Economies, 12(5), January, doi: 10.1504/IJEPEE.2019.104637

Solow, R. (1987). We’d better watch out. New York Times Book Review: 36.

Song, F., Thakor, A. (2007). Relationship Banking, Fragility, and the Asset-Liability Matching Problem. Review of Financial Studies, 20(6): 2129-2177.

Temkin, K., Kormendi, R. (2003). An Exploration of a Secondary Market for Small Business Loans. Washington, DC: SBA Office of Advocacy.

Truby, J., Dean Brown, R., Dahdal, A. M. (2020). Banking on AI: Mandating a Proactive Approach to AI Regulation in the Financial Sector. Law and Financial Markets Review, 14(2), doi: 10.1080/17521440.2020.1760454

Varma, P., Nejjer, S., Sood, K., Grima, S., Rupeika-Apoga, R. (2022). Thematic Analysis of Financial Technology (Fintech) Influence on the Banking Industry. Risks, 10: 186. https://doi.org/10.3390/risks 10100186 Academic Editor: Mogen.

Wang, B. (2020). Executive pay gap and risk-taking: Based on the empirical evidence of Chinese Listed Banks. Financial development review, 11: 80-94.