Source: Economic Research Forum
Author(s): Ishac Diwan, Marc Schiffbauer
In Egypt, the bulk of bank loans during 2003-2010 went to politically connected firms. At the same time, the banking sector was liberalized increasingly operated around competitive and profit-maximizing principles. A key puzzle that the paper tries to answer is why private banks may lend in preferential ways to politically connected firms (PCFs) in such an environment. Using a rich corporate dataset, we find that politically connected firms did not have higher profitability compared to non-politically connected firms. This suggests that PCFs were perceived to have lower risk. Indeed, we find evidence that this was the case, and that lower risk reflected higher access to bailout guarantees (implicit or explicit), as happened in earlier periods, and/or higher perceived growth opportunities…
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