Legal origin and bank lending behavior in developing countries: The mediating role of revenue diversification

This paper explores the relationship between legal origin, revenue diversification, and bank lending behavior. The analysis is based on a sample of 2590 commercial banks operating in 139 developing countries from 2004 to 2022. Using various panel data estimation techniques and alternative measures of bank lending behavior, the results indicate that banks in common law countries experience lower levels of loan growth compared to their counterparts in civil law countries. The study results also show that revenue diversification indirectly alleviates the negative effect of loan growth in banks originating from a common law legal origin. Notably, this effect is not observed in banks within low-income and African countries, highlighting the importance of policies aimed at enhancing institutional capacity within their legal and judicial systems. Overall, the results of this study underscore the significance of legal origins in shaping the lending dynamics of banks in developing countries.