Corruption and bank efficiency: Expanding the ‘sand or grease the wheel hypothesis’ for the Gulf Cooperation Council

We draw upon the broader theoretical framework of rent‐seeking to empirically analyze the impact of corruption on the efficiency of the banking industry in the Gulf Cooperation Council. We have used various databases, including Bankscope, World Bank, and Transparency International, to gather Bank‐specific and macro‐economic data for 77 banks covering the period 2005–2014. We perform ordinary least square (OLS) and generalised methods of moments regression (GMM) using a balanced panel and find (1) Islamic banks as less efficient and stable as compared to conventional banks in the GCC region, (2) corruption has a negative (positive) impact on Islamic (conventional) banks' stability. Our findings provide support for the ‘sand the wheel’ hypothesis of corruption for Islamic banks. This finding supports the view that under the current weak governance structures and complex policy framework, corruption acts as an ‘escape hatch’ for conventional banks. Our empirical findings could pave the way for further policy reform for the banking sector in the GCC region.