The role of competition and economic freedom in bank lending

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Abstract

Based on theory, Stiglitz and Weiss (1981) caution that liberalization may not always expand credit due to governance challenges such as moral hazard and adverse selection. This study examines the effect of bank competition and economic freedom on bank lending, with particular attention to their governance and regulatory implications. Using a system generalized method of moments (system-GMM) approach on an unbalanced panel of 214 countries from 1993 to 2017, this study investigates both the individual effects and the interaction between bank competition and economic freedom. The results reveal that both variables individually exert a negative effect on bank lending. However, their interaction produces asymmetrical outcomes: it significantly increases lending in high-income countries, while reducing it in low- and middle-income countries. These results reinforce that a country’s readiness to face market openness is a determining factor in increasing lending channels. These findings highlight the uneven impact of economic openness and suggest important implications for governance structures, regulatory frameworks, and policymakers in designing context-sensitive financial regulations.

Keywords: Bank Lending, Bank Competition, Economic Freedom, Regulation

Authors’ individual contribution: Conceptualization — T.R.A. and D.L.; Methodology — D.L.; Software — T.R.A. and D.L.; Validation — D.L.; Formal Analysis — T.R.A.; Investigation — T.R.A. and D.L.; Resources — D.L.; Data Curation — T.R.A.; Writing — Original Draft — T.R.A. and D.L.; Writing — Review & Editing — T.R.A.; Visualization — T.R.A. and D.L.; Supervision — D.L.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: F130, G21, G380

Received: 20.03.2025
Revised: 02.07.2025; 24.08.2025; 07.10.2025
Accepted: 27.10.2025
Published online: 30.10.2025

How to cite this paper: Attaqiyya, T. R., & Lesmana, D. (2025). The role of competition and economic freedom in bank lending. Risk Governance and Control: Financial Markets & Institutions, 15(4), 54–64. https://doi.org/10.22495/rgcv15i4p5