Rentier Economy and the Banking Sector in Iraq: An Integrated Analysis of the Impact of Revenues on Assets and Credit
DOI:
https://doi.org/10.57125/FEL.2025.12.25.02Keywords:
Rentier Economy, Institutional Economics, Financial Regulation, IraqAbstract
This study aimed to demonstrate the impact of oil revenues in Iraq on banking activities, utilising a monthly time series consisting of 108 observations spanning the period 2016–2024. For this purpose, the ARDL bounds testing approach was used to capture both short- and long-term effects. Diagnostic tests confirm cointegration (F-statistics: 5.28 for assets, 15.74 for credit), affirming the existence of a stable long-run relationship. This study fills a critical research gap by providing the first quantitative econometric assessment of how oil revenues affect Iraqi banking activities under the country's distinctive fixed exchange rate regime and foreign-currency auction system. The results showed that oil revenues have a direct positive impact on the assets (BA) and credit (BC) of the Iraqi banking sector in both the long and short terms. Specifically, increased oil revenues (OR) lead to increases in (BA) and (BC) of (0.035, 0.003) in the short run and (2.852, 0.057) in the long run, respectively. Furthermore, Iraq’s use of the foreign-currency auction window to achieve price-level stability through a fixed exchange rate system, alongside significant government employment, has provided a stable source of income for the banking sector. This structure has partially protected the banking sector from the harmful effects arising from oil price volatility during crises. Policy implications emphasise that banking sector resilience requires macroeconomic restructuring rather than regulatory interventions alone. Specifically, the study recommends diversifying government revenues through non-oil sector development and establishing sovereign wealth funds to absorb commodity price shocks, thereby stabilising financial flows and ensuring sustainable banking growth during economic crises.
References
Abdul, K., Ali, F., And, K., Wahid, J., (2021). Volatility of financial revenues and its impact on the Iraqi banking sector. Iraqi Journal For Economic Sciences, 2021 (68), 89–109. https://doi.org/10.31272/IJES2021.68.5
Adetutu, M. O., Odusanya, K. A., Ebireri, J. E., & Murinde, V. (2020). Oil booms, bank productivity and the natural-resource curse in finance. Economics Letters, 186, Article 108517. https://doi.org/10.1016/j.econlet.2019.07.002
Al-Khazali, O. M., & Mirzaei, A. (2017). The impact of oil price movements on bank non-performing loans: Global evidence from oil-exporting countries. Emerging Markets Review, 31, 193–208. https://doi.org/10.1016/j.ememar.2017.05.006
Ali, B., Khan, D., Shafiq, M., Magda, R., & Oláh, J. (2022). The asymmetric impact of oil price shocks on sectoral returns in Pakistan: Evidence from the non-linear ARDL approach. Economies, 10(2), Article 46. https://doi.org/10.3390/economies10020046
Alqahtani, F., Samargandi, N., & Kutan, A. M. (2020). The influence of oil prices on the banking sector in oil-exporting economies: Is there a psychological barrier? International Review of Financial Analysis, 69, Article 101470. https://doi.org/10.1016/j.irfa.2020.101470
Alsagr, N. (2024). Revisiting the natural resources rent and financial development nexus: Does geopolitical risk and corruption really matters? Resources Policy, 89, Article 104638. https://doi.org/10.1016/j.resourpol.2024.104638
Alzyadat, J. A. (2021). Sectoral banking credit facilities and non-oil economic growth in Saudi Arabia: Application of the autoregressive distributed lag (ARDL). The Journal of Asian Finance, Economics and Business, 8(2), 809–820. https://doi.org/10.13106/JAFEB.2021.VOL8.NO2.0809
Auty, R. (2002). Sustaining development in mineral economies (0 edn). Routledge. https://doi.org/10.4324/9780203422595
Banerjee, A., Dolado, J. J., Galbraith, J. W., & Hendry, D. (1993). Co-integration, error correction, and the econometric analysis of non-stationary data (1st edn). Oxford University PressOxford. https://doi.org/10.1093/0198288107.001.0001
Barajas, A., Chami, R., & Yousefi, S. R. (2013). The finance and growth nexus re-examined: Do all countries benefit equally? (Imf Working Paper No. 13/130). Washington, Dc: International Monetary Fund. http://www.Imf.Org/External/Pubs/Ft/Wp/2013/W
Bilgili, F., Kassouri, Y., Kuşkaya, S., & Majok Garang, A. P. (2024). The dynamic nexus of oil price fluctuations and banking sector in China: A continuous wavelet analysis. Resources Policy, 88, Article 104449. https://doi.org/10.1016/j.resourpol.2023.104449
Callen, T., Khandelwal, P., Miyajima, K., & Santos, A. (2015, November). Oil prices, financial stability, and the use of countercyclical macroprudential policies in the GCC. In Prepared for the annual meeting of ministers of finance and central bank governors. https://www.imf.org/external/np/pp/eng/2015/111015a.pdf
Chin, L., Saydaliev, H. B., & Kadyrov, S. (2023). The asymmetric effect of oil price fluctuation on non-performing loans in Kazakhstan: Evidence from the Ricardian curse of the resource. Boom. Journal of East-West Business, 29(2), 114–137. https://doi.org/10.1080/10669868.2022.2141940
Dwumfour, R. A., & Ntow-Gyamfi, M. (2018). Natural resources, financial development and institutional quality in Africa: Is there a resource curse? Resources Policy, 59, 411–426. https://doi.org/10.1016/j.resourpol.2018.08.012
Elhannani, F. E., Boussalem, A. B., & Benbouziane, M. (2016). Financial development and the oil curse: Evidence from Algeria. Topics in Middle Eastern and North African Economies, 18. https://meea.sites.luc.edu/volume18/pdfs/5%20-%20Revised%20Financial%20Dev%203-15-16.pdf
Elsayed, A. H., Naifar, N., Uddin, G. S., & Wang, G.-J. (2023). Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries. International Review of Financial Analysis, 87, Article 102602. https://doi.org/10.1016/j.irfa.2023.102602
Hani, S., & Sinambela, E. (2020). Indonesia’s bank response of interest rates to the prices of world crude oil and foreign rates of interest. International Journal of Energy Economics and Policy, 11(1), 558–564. https://doi.org/10.32479/ijeep.10692
Ibrahim, M. H. (2019). Oil and macro-financial linkages: Evidence from the GCC countries. The Quarterly Review of Economics and Finance, 72, 1–13. https://doi.org/10.1016/j.qref.2019.01.014
Javed, S., & Husain, U. (2020). An ARDL investigation on the nexus of oil factors and economic growth: A timeseries evidence from Sultanate of Oman. Cogent Economics & Finance, 8(1), Article 1838418. https://doi.org/10.1080/23322039.2020.1838418
Kareem, P. H., Ali, M., Tursoy, T., & Khalifa, W. (2023). Testing the effect of oil prices, ecological footprint, banking sector development and economic growth on energy consumption: Evidence from the bootstrap ARDL approach. Energies, 16(8), Article 3365. https://doi.org/10.3390/en16083365
Katırcıoglu, S., Ozatac, N., & Taspınar, N. (2020). The role of oil prices, growth and inflation in bank profitability. The Service Industries Journal, 40(7–8), 565–584. https://doi.org/10.1080/02642069.2018.1460359
Kurronen, S. (2015). Financial sector in resource-dependent economies. Emerging Markets Review, 23, 208–229. https://doi.org/10.1016/j.ememar.2015.04.010
Li, Y., Naqvi, B., Caglar, E., & Chu, C.-C. (2020). N-11 countries: Are the new victims of resource-curse? Resources Policy, 67, Article 101697. https://doi.org/10.1016/j.resourpol.2020.101697
Li, Z., Rizvi, S. K. A., Rubbaniy, G., & Umar, M. (2021). Understanding the dynamics of resource curse in G7 countries: The role of natural resource rents and the three facets of financial development. Resources Policy, 73, Article 102141. https://doi.org/10.1016/j.resourpol.2021.102141
Ma, Y., Zhang, Y., & Ji, Q. (2021). Do oil shocks affect Chinese bank risk? Energy Economics, 96, Article 105166. https://doi.org/10.1016/j.eneco.2021.105166
Maghyereh, A., & Abdoh, H. (2021). The effect of structural oil shocks on bank systemic risk in the GCC countries. Energy Economics, 103, Article 105568. https://doi.org/10.1016/j.eneco.2021.105568
Mamonov, M., Parmeter, C. F., & Prokhorov, A. B. (2024). Bank cost efficiency and credit market structure under a volatile exchange rate. Journal of Banking & Finance, 168, Article 107285. https://doi.org/10.1016/j.jbankfin.2024.107285
Naceur, S. B., & Ghazouani, S. (2007). Stock markets, banks, and economic growth: Empirical evidence from the MENA region. Research in International Business and Finance, 21(2), 297–315. https://doi.org/10.1016/j.ribaf.2006.05.002
Omer, Al-D., & Mays, I. (2022). The extent of implementation of Basel III requirements by Iraqi banks: An analytical study of a sample of private banks operating in Iraq. Enterprenuership Journal For Finance and Bussiness, 28–42. https://doi.org/10.56967/ejfb202262
Ozili, P. K. (2025). Financial stability determinants in Nigeria: Role of profitability, capital regulation, financial inclusion, inflation, unemployment and economic growth. African Journal of Economic and Management Studies, 1–12. https://doi.org/10.1108/AJEMS-01-2025-0060
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
Saif-Alyousfi, A. Y. H., Saha, A., & Md-Rus, R. (2018). Impact of oil and gas price shocks on the non-performing loans of banks in an oil and gas-rich economy: Evidence from Qatar. International Journal of Bank Marketing, 36(3), 529–556. https://doi.org/10.1108/IJBM-05-2017-0087
Shaffer, B., & Ziyadov, T. (Eds). (2012). The natural resource curse: A survey. In Beyond the Resource Curse (pp. 17–57). University of Pennsylvania Press. https://doi.org/10.9783/9780812206173.17
Tang, C., Irfan, M., Razzaq, A., & Dagar, V. (2022). Natural resources and financial development: Role of business regulations in testing the resource-curse hypothesis in ASEAN countries. Resources Policy, 76, Article 102612. https://doi.org/10.1016/j.resourpol.2022.102612
Umar, M., Ji, X., Mirza, N., & Rahat, B. (2021). The impact of resource curse on banking efficiency: Evidence from twelve oil producing countries. Resources Policy, 72, Article 102080. https://doi.org/10.1016/j.resourpol.2021.102080
Wang, T. (2021). Local banks and the effects of oil price shocks. Journal of Banking & Finance, 125, Article 106069. https://doi.org/10.1016/j.jbankfin.2021.106069
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 author
This work is licensed under a Creative Commons Attribution 4.0 International License.
