This paper examines the effect of economic policy uncertainty (EPU) on credit risk, lending decisions and banking performance of Tunisian listed banks over the period 1999–2019.
To identify the relationship between EPU, credit risk, lending decisions and banking performance, we have proceeded with a fixed effects panel regression model over the period 1999–2019.
Our empirical analysis showed a significant positive effect of EPU on credit risk and a significant negative effect on loan size and performance. We have also found that state-owned banks were the most affected by increasing EPU. Their credit risk has increased and their returns have decreased. While highly leveraged private banks have recorded a sharp decline in their results.
Facing increasing credit risks, generated by EPU, Tunisian banks are allowed to revise their lending decisions to ensure consequently their sustainability and performance.
Tunisian resident banks should set up a monitoring system and an early-warning system of credit risk in order to guarantee both, their performance and the sustainability of the economy's financing.
A good banking governance and a stable economic and political environment are the key factors that improve the allocation of credit, credit risk diversification and the creation of added value for the different activity sectors.
On the theoretical as well as on the empirical level, the analysis of the Tunisia EPU on credit risk, bank lending strategy and banking performance was not handled previously in the literature. It was noted that state banks are more influenced by the increase of EPU. Their credit risk has increased and their returns have declined. However, private banks with a high leverage effect have recorded a net decrease in their results. Since the 2011 revolution, invisibility and EPU have largely influenced the bank lending decisions and subsequently banking performance.
