Does Corruption Moderate the Relationship between Climate Adaptation and Credit Quality? Evidence from Iraqi Banks

In volatile institutional environments, climate adaptation efforts may not translate directly into improved financial outcomes unless mediated by governance quality. Iraq presents a compelling case where chronic corruption intersects with acute climate vulnerability, creating systemic risks for the banking sector. The case of Iraq provides an interesting avenue for exploring the degree to which corruption undermines state-led climate resilience efforts and affects the financial sector's vulnerabilities. This paper examines the association between climate adaptation capacity and credit quality in the banking sector in Iraq, with government corruption as a moderating factor. The study relied on panel data covering 18 banks during the period (2013–2023), and the model was estimated using the Feasible Generalized Least Squares (FGLS) method. The results showed an inverse relationship between improvements in climate resilience, as represented by changes in the ND-GAIN index, and loan loss provisions (LLP). Notably, the interaction term is negative and statistically significant (β = −0.0083, p = 0.027). Also, the period coinciding with the COVID-19 pandemic saw lower LLPs compared to previous years, likely due to extraordinary government interventions during the global crisis. The study proved that climate adaptation alone is insufficient to deliver governance-based solutions in the presence of institutional fragility and emphasizes that policy responses to environmental resilience must integrate institutional approaches. Future research should focus on the broader governance characteristics that are associated with banking asset quality under climate stress, e.g., government effectiveness, control of corruption, and quality of regulation.