This paper investigates the impact of net capital inflows on credit to the private sector as a share of gross domestic product. It tries to assess to what extent net capital inflows could lead to excessive credit growth and, hence, undermine financial stability. The pooled mean group for the cointegration method is employed in this paper. The results show that net capital inflows may have a negative long run impact on financial stability in the Arab countries through increasing credit growth. With different types of capital inflows, the implications on financial stability differ. The results show that direct and portfolio investments have both insignificant impact on credit to the private sector in the long run, while other investments show a potential long run positive impact on credit to the private sector in the Arab countries.
