Determinants of Credit Growth and Its Impact on Banking Efficiency: An Analytical Study of a Sample of Commercial Banks Listed on the Iraq Stock Exchange from 2005 to 2023

Abstract

The banking sector in post-conflict and resource-dependent economies faces unique efficiency challenges shaped by institutional fragility, macroeconomic volatility, and structural constraints on credit allocation. In Iraq, commercial banks operate under conditions of persistent political instability, inflationary pressures, and limited financial inclusion, yet systematic evidence on how credit growth determinants affect banking efficiency remains scarce. This study examines the impact of internal determinants (loan quality, capital adequacy, bank size, and loan growth) and external determinants (interest rate, inflation, and exchange rate) on the efficiency of nine commercial banks listed on the Iraq Stock Exchange over the period 2005–2023. Banking efficiency was estimated using an input-oriented Data Envelopment Analysis (DEA) model, with deposits and operating expenses as inputs and net profit as the output. DEA efficiency scores then served as the dependent variable in a backward elimination multiple regression incorporating all seven determinants. Financial data were sourced from Iraq Stock Exchange filings, while macroeconomic indicators were obtained from the Central Bank of Iraq. The results reveal substantial and persistent inefficiency, with a sample-wide average DEA score of 0.41 and sharp temporal fluctuations linked to periods of economic and political instability. The regression model explains 89.9% of the variation in efficiency (R² = 0.899, F = 17.878, p < 0.001). Bank size emerged as the strongest negative predictor (β = −1.033, p = 0.001), followed by capital adequacy (β = −0.375, p = 0.009) and loan quality (β = −0.345, p = 0.015), indicating that larger banks, excessive capitalisation, and deteriorating loan portfolios significantly impair efficiency. Among external factors, inflation exerted a significant negative effect (β = −0.572, p = 0.017), while interest rates showed a positive but marginally significant association. The exchange rate was eliminated as non-significant. These findings demonstrate that both internal banking practices and external macroeconomic conditions jointly shape efficiency in fragile economies, with internal factors exerting the dominant influence. The study contributes to the banking efficiency literature by providing the first comprehensive DEA-based longitudinal assessment of Iraqi commercial banks, offering comparative lessons for other emerging and conflict-affected economies. Policymakers and bank regulators should prioritise improving loan quality management, optimising capital deployment, and adopting flexible monetary frameworks to strengthen banking resilience.