Creditor rights protection and bank stability in developing countries: evidence from Tunisia

Abstract

This paper analyzes the impact of creditor rights protection and the potential impact of interaction between legal rights and information sharing on the financial stability of banks in a developing country. We look at a sample of Tunisian listed banks over the period 2005-2018. We use an econometric method on a panel data framework that deals with heteroscedasticity and contemporaneous correlation problems. We show that poor legal protection of creditor rights increases Tunisian bank fragility. Indeed, the weakness of bankruptcy laws that favor debtors at the expense of creditors and the distorted collateral regime are significant in explaining the non-performing loans levels of Tunisian banks. In addition, our findings highlight the importance of credit information sharing in enhancing bank’s credit quality. This effect is not only statistically significant but also economically large. Results suggest that an increase in credit information depth index by one standard deviation reduces bank risk by 1.59 percentage points. Finally, we show that the development of credit information sharing cannot substitute to a poor legal protection of creditor rights. Therefore, a true improvement of bank credit quality requires reforms toward more efficient insolvency procedures and collateral enforcement.