The Nexus of Competition, Loan Quality, and Ownership Structure for Risk-Taking Behaviour

Round 1

Reviewer 1 Report

This is an interesting paper and I enjoyed reading it. However, there are essential weaknesses that need to be addressed.

 

1) The introductory/opening section should communicate a little clearer the literature gaps, as well as the study's aims & objectives in order to facilitate the flow of the study.

 

2) Overall there are good arguments and well researched points made in this paper, but I feel that author needs to take ´Literature review´ to a further level.  

 

I strongly recommend that you include the following references focused on the target journal and on the paper’s topics:

 

Cheng, L., & Zhang, Y. (2022). Do able managers take more risks? Journal of Innovation & Knowledge, 7(2), 100182. https://https://doi.org/10.1016/j.jik.2022.100182

 

Giaretta, E., & Chesini, G. (2021). The determinants of debt financing: The case of fintech start-ups. Journal of Innovation & Knowledge. 6(4), 268-279. DOI: 10.1016/j.jik.2021.10.001

 

Hao, Z., Zhang, X., & Wei, J. (2022). Research on the effect of enterprise financial flexibility on sustainable innovation. Journal of Innovation & Knowledge, 7(2), 100184. https://https://doi.org/10.1016/j.jik.2022.100184

 

Zheng, C. (2022). An innovative MS-VAR model with integrated financial knowledge for measuring the impact of stock market bubbles on financial security. Journal of Innovation & Knowledge, 7(3), 100207. https://https://doi.org/10.1016/j.jik.2022.100207

 

3) The research is well-developed.

 

4) At the end of the ´Conclusion´ section, the author should include clear statements as to where research should now go.

 

5) Carefully check the references, so as to make sure they are all complete and follow the Guidelines to Authors.

 

6) Finally, when you submit the corrected version, please do check thoroughly, in order to avoid grammar, syntax or structure/presentation flaws.

 

Thank you for the opportunity to read the paper.

 

Author Response

Manuscript ID- jrfm-2135858

Response to the Reviewer,

 

Thanks! We are grateful for your helpful response.

Thank you so much, "Dear Editors/Reviewer", for giving us the time to improve our paper with your valuable time and comments. We respect your every comment and suggestion cordially. Thanks a lot again for giving us an opportunity.

*Dear Editors/Reviewer, We inform you that we have improved our paper with all the points according to your comments. Please see the following answer, and we will always welcome any constructive suggestions. Thanks once again.

 

Reviewer-Response:

1) The introductory/opening section should communicate a little clearer the literature gaps, as well as the study's aims & objectives in order to facilitate the flow of the study.

 Response: Thank you so much for your interesting suggestion. We have improved our introduction and literature sections to facilitate our study flow. Please see the introduction section, para 3, line 3-8 and literature section- 2.2.3, line 4-8 .

2) Overall there are good arguments and well researched points made in this paper, but I feel that author needs to take ´Literature review´ to a further level. 

 Response: Thank you so much for your interesting suggestion. We have improved our literature section according to your suggestion to facilitate our study flow. Please see section 2.2.3.

I strongly recommend that you include the following references focused on the target journal and on the paper’s topics:

 Response: Thank you so much for your helpful corrections. We have cited references in the Introduction section, para- 3, literature review section 2.2.3

Cheng, L., & Zhang, Y. (2022). Do able managers take more risks? Journal of Innovation & Knowledge, 7(2), 100182. https://https://doi.org/10.1016/j.jik.2022.100182

Giaretta, E., & Chesini, G. (2021). The determinants of debt financing: The case of fintech start-ups. Journal of Innovation & Knowledge. 6(4), 268-279. DOI: 10.1016/j.jik.2021.10.001

Hao, Z., Zhang, X., & Wei, J. (2022). Research on the effect of enterprise financial flexibility on sustainable innovation. Journal of Innovation & Knowledge, 7(2), 100184. https://https://doi.org/10.1016/j.jik.2022.100184

Zheng, C. (2022). An innovative MS-VAR model with integrated financial knowledge for measuring the impact of stock market bubbles on financial security. Journal of Innovation & Knowledge, 7(3), 100207. https://https://doi.org/10.1016/j.jik.2022.100207

 

3) The research is well-developed.

Response: Thank you so much for your positive response.

 

4) At the end of the ´Conclusion´ section, the author should include clear statements as to where research should now go.

 Response: Thank you so much for your helpful suggestions. Yes, we have improved our conclusion section and given a specific statement about our manuscript. Please see conclusion section 5.

The study findings indicate a negative (positive) relationship between MENA bank competition and risk (financial stability). It indicates that lower bank competition reduces bank credit risk and increases financial stability in MENA countries. Regarding ownership structure, Islamic banks display a stronger position in MENA economies than Commercial banks and Specialized Government Institutions. In contrast, specialized government institutions are riskier than commercial banks and Islamic banks. Loan quality shows the two-way causality between the degree to which banks compete and the quality of their loans to customers in the MENA markets. Findings also show a positive relationship between competition and loan composition. Further, it shows a negative (positive) relationship between credit risk (financial stability) and loan composition in MENA countries. It indicates the two-way causality between the degree to which banks compete and the risk (financial stability) of their loans to customers in the MENA markets. 

This study suggests to policymakers of MENA countries. Since this study shows a negative but statistically significant relationship between competition and NPL, whereas the Z-score shows a positive and statistically significant relationship between competition and financial stability, policymakers should create lower competitive banking markets in emerging (MENA) countries. It appears that banks in the MENA region need to enhance their methods of managing and monitoring their non-performing loans. As a result, the level of credit risk will decrease, resulting in increased financial stability. Policymakers and other stakeholders need to modify the risk they assume and their level of financial stability based on the ownership structure. Notably, the stakeholders in this region can concentrate their attention on Islamic banks because, compared to alternative ownership arrangements, Islamic banks have proven superior. This study found that if loan quality increases, then credit risk increases, and for this reason, it reduces financial stability in MENA countries. This study also found that if loan composition increases, NPL will increase, reducing financial stability in MENA countries. It also suggests that quick improvements be made in this region to both the loan quality and the loan composition to reduce financial disruption, which turns to financial stability in MENA countries.

Additionally, competition among banks reduces each bank’s market share and clientele, exceptionally when supply is constrained. Reduced profit margins for each service might result from a competitive market’s need to cut prices to remain competitive. It should be kept in mind, too, that increased competition might push banks to take more significant risks. Increased risk-taking may result in a financial market catastrophe and an economic crisis. Finally, the policymakers ought to apply a considerable policy launched to alleviate the credit risk for boosting financial stability in a lower competitive environment; the investors can be aware of putting their money in a bank ownership structure.

 

5) Carefully check the references, so as to make sure they are all complete and follow the Guidelines to Authors.  

Response: Thank you so much for your helpful observations. Yes, we have doubled check all our references and updated them by endnote-7. Such as [31, 32]

 

6) Finally, when you submit the corrected version, please do check thoroughly, in order to avoid grammar, syntax or structure/presentation flaws.

 Response: Thank you so much for your helpful suggestions. We have edited our language and grammar syntax or structure/presentation flaws.

Thank you for the opportunity to read the paper.

Thank you so much for your valuable comments.

Author Response File: Author Response.pdf

Reviewer 2 Report

The  paper is interesting and I have only some minor comments reported below:

1) Explain quantitative measures such as the Z-score and ?ROA immediately in the text when they are discussed for the first time. Not all readers may be acquainted with them (particularly policy makers)

  2)  No need to report the R2 and the Adjusted R2 for the ADF tests, as well as all the quantiles. Simply report the test statistics with an asterisk if they reject the null at the 5% level   3) the misspecifications tests for your equations should be discussed more.

Author Response

Manuscript ID- jrfm-2135858

Response to the Reviewer,

 

Thanks! We are grateful for your helpful response.

Thank you so much, "Dear Reviewer", for giving us the time to improve our paper with your valuable time and comments. We respect your every comment and suggestion cordially. Thanks a lot again for giving us an opportunity.

*Dear Reviewer, We inform you that we have improved our paper with all the points according to your comments. Please see the following answer, and we will always welcome any constructive suggestions. Thanks once again.

Reviewer- response:

• Explain quantitative measures such as the Z-score and ?ROA immediately in the text when they are discussed for the first time. Not all readers may be acquainted with them (particularly policy makers)

Response: Thank you so much for your interesting and helpful suggestions. Yes, we have mentioned the meaning of the short form when we used first-time z-score,  ROA, NPL, and other short forms. Please see section 2.2.4. line 5 -9.

They revealed a negative association between financial stability (Z-score) [Z-score determined by the return on assets + (equity/total assets)/ standard deviation of total assets] and loan quality. After deciding to use the z-score as the dependent variable in their study. It is interesting to note that they also revealed a positive link between overall risk (?ROA) [?ROA determined by the standard deviation of total assets] and loan quality.

  2)  No need to report the R2 and the Adjusted R2 for the ADF tests, as well as all the quantiles. Simply report the test statistics with an asterisk if they reject the null at the 5% level  

Response: Thank you so much for your exciting correction. We have added a decision ( accepted/ rejected at 1% or 5% level) of the ADF test. Please see table 1.

 3) the misspecifications tests for your equations should be discussed more.

Response: Thank you so much for your interesting suggestion. We have explained all the test results. Please see section 3, equations 1, 2, 3, 4, and 4-i. Again see subsection 3.1, equations 10 and 11. See subsection 3.2 and subsections 3.4 and 3.5.

 

Thank you so much for your valuable comments.

Author Response File: Author Response.pdf

Reviewer 3 Report

A file with the report is attached.

Comments for author File: Comments.pdf

Author Response

Manuscript ID- jrfm-2135858

Response to the Reviewer,

Thanks! We are grateful for your helpful response.

Thank you so much, "Dear Reviewer", for giving us the time to improve our paper with your valuable time and comments. We respect your every comment and suggestion cordially. Thanks a lot again for giving us an opportunity.

*Dear Reviewer, We inform you that we have improved our paper with all the points according to your comments. Please see the following answer, and we will always welcome any constructive suggestions. Thanks once again.

 Reviewer –response:

1. L.20. It should be "The core purpose of the paper is ...".

 

Response: Thank you so much for the helpful suggestion. Yes, We have done it according to your suggestion. Please see it [abstract section line 1-2] as follows:

“The core purpose is to explore the relationship between competition, loan quality, ownership structure, and risk for MENA economies.”

 

 

2. L.8889. Why is it ordered from 5 to 2? It should be from 2 to 5 in my opinion.

Response: Thank you so much for the helpful suggestion. Yes, we have done it according to your suggestion. Please see it [introduction section last para] as follows:

The rest of the segments are as follows: 2. Literature review; 3. Methodology; 4. Regression Analysis and Discussion; 5. Conclusion, Policy Implication, and Future direction.

 

 

3. Equation (1). It should be

LIi;t = Pi;t - MCi;t / Pi;t

 

Response: Thank you so much for the helpful suggestion and correction. Yes, we have modified it according to your suggestion. Please see it [ section 3, equation 1] as follows:

 

                                                               

 

4. Equations (2) and (3). Why are the total and marginal costs defined like this? What is the meaning of the products lnWj;itlnWk;it in (2)? Together with it, the authors should use W2 and W3 instead of w2 and w3 all over the text and decide either they set the commas between the indices i and t in the all formulas or not.

 

Response: Thank you so much for the helpful suggestion and correction. Yes, we have modified it according to your suggestion. We follow Berger, A.N.,et. al (2017) to determine the Marginal cost (proxy by translog function). Please see the details in equation 2, section 3. Yes, we have used commas in all formulas.

                            

Here, ln signifies the natural logarithm; cost denotes the total cost; Q is the bank’s single output proxied by total assets. W_k and W_j denote the three input prices W_1, W_2, and W₃ [39]_. W_1, W_2, and W₃ are the input price used in the production process. W₁ defines the price of labour (i. e., personal expenses to total assets); W₂ defines the input price of the fund (i.e., interest expenses over total deposits); W₃ defines the price of fixed capital (i.e., other operating and administrative expenses over total assets). Finally, determine as marginal cost (Equation-3):

                                                                                

 

5. L.219-220. The phrase "Q designates the bank's output which proxy by total assets is" is unclear and grammatically incorrect.

Response: Thank you so much for the helpful correction. Yes, we have improved our manuscript grammatically. Q is the bank’s single output proxied by total assets.

 

 

6. L.226228. The sentence is unclear and should be divided into parts.

Response: Thank you so much for the helpful correction. Yes, we have improved our manuscript grammatically. See it section 3, equation-4,

Herfindahl–Hirschman Assets Index (HHIA): The Herfindahl-Hirschman Assets Index (HHIA) calculate the ratio of bank assets of each bank and the sum of all the bank’s assets by squaring that ratio [40]. HHIA calculation is as follows (Equation-4) [40, 41]:

Where assets _{i, t} is the bank’s assets share in each market and Market assets_i,t is the sum of all the banks’ assets shares.

 

7. L.229231. It should be altered as "It measures the level of market concentration at the country level; higher values indicate a greater level of market concentration [37]".

Response: Thank you so much for the helpful correction. We have followed your suggestion: see it.

Herfindahl–Hirschman Loans Index (HHIL): It measures the level of market concentration at the country level; higher values indicate a greater level of market concentration  [39]. The HHIL is calculated by squaring each bank’s market share (loans based) and then summing the squares. HHIL calculation is as follows (Equation- 4-i) [15, 42]:

The HHIA and HHIL rating of zero (0) indicates that the market is homogenous. A lower value suggests lower market power, indicating intense market competition [43].

 

8. Equation (4). Are the both indicators calculated with the same formula?

Response: Thank you so much for your interesting question. No, we have used a different formula for HHIA  and HHIL. Please see it as follows.

 

 

9. Equation (10). The variables BCi;t, OWSi;t, BCVi;t, Mi;t should also depend on c, o, j, l, respectively, because of the sums are made with respect to these indices.

Response: Thank you so much for the helpful observations. We have re-write our research equations; Please see equations 10 and 11.

 

Here, NPL indicates non-performing loans of banks that use dependent variables In Equation 10. NPL uses as the proxy variable of credit risks of banks.  indicates the one-year lag period of NPL.

Here Z-score uses as the dependent variable in Equation 11. Z-score uses as the proxy variable of the financial stability of banks.  indicates the one-year lag period of the z-score.

The “i” and “t” subscript in equations 10 and 11 refer to the number of banks and time, respectively (i.e., t= 2011, 2012, 2013.............2020). Here, j and m cover the bank’s control level (loan composition, loan quality, bank size, and customer) and macroeconomic variables (GGDP, inflation rate).

Equations 10 and 11, BC_i,t specifies three Bank competition indicators (i) Lerner index, ii) HHIA, iii) HHIL. OWS_i,t represents ownership structure I) Islamic banks, II) Commercial-banks and III) Specialized government institutions; BCV_i,j,t indicates control variables a) Loan-composition, b) Loan-quality, c) size, and d) customers); M_i,m,t indicates Macroeconomic Variables i) The gross domestic product growth (GGDP), ii) Inflation rate. α and β is the estimated parameter in Equations 10 and 11, respectively, and signifies the error term.

 

 

 

10. Equation (11). Does actually Z not depend on the bank number? Is Z and z the same variable? Again, the variables BCi;t, OWSi;t, BCVi;t, Mi;t should also depend on c, o, j, l, respectively, because of the sums are made with respect to these indices.

Response: Thank you so much for the helpful observations. We have re-write our research equation 11; Thanks once again. Yes, Z and z, we used the same variable. Now, we have re-write both Z-scores. Please see equation 11.

 

 

11. Equations (10) and (11). Are there in fact the same coe‑cients α1,...,α5 in the equations? I seem it is incorrect. If there are actually the same coe‑cients, it should be explained.

Response: Thank you so much for the helpful observations. Yes, we have modified it. See equations 10 and 11.

 

 

12. L.300. What are the macroeconomic variables?

Response: Thank you so much for the helpful observations. We used gross domestic product growth (GGDP) and Inflation rate as macroeconomic variables.

 

13. Subsections 3.2 and 3.5. These tests seem specic and non-trivial. The authors should at least give references on the theory.

Response: Thank you so much for your interesting question. Yes, we added reference about that issue. We follow Gupta and Yesmin (2022) [2022] to test the ADF test and VIF. Please see subsection 3.2, para-1, first line, and subsection 3.5, para 1, line 3.

 

14. Section 4. The same problems with the equations as with the equations (10) and (11).

The decision on the paper is the major revision.

Response: Thank you so much for the helpful observations. Yes, we have modified it. See equations 10 and 11. See section 4.

 

Thank you so much for your valuable comments.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Nothing

Reviewer 3 Report

I have no other questions.