Are competition and performance friends or foes? Evidence from the Middle East banking sector

Abstract

PurposeThis paper aims to investigate the impact of banking market competition on banks’ profitability and banks’ risk using a sample of six countries from the Middle East from 2006 to 2017.Design/methodology/approachThis paper uses the system generalized method of moments estimator to tackle potential omitted variable bias, endogeneity and simultaneity issues.FindingsAfter controlling for bank market and country-specific characteristics, this study reports strong and robust evidence that competition in the banking market is conducive to lower financial performance. This research further finds that intense banking competition leads to lower profitability and increased risk regardless of bank type. As the relationship is not different for Islamic banks, one can argue that activities of Islamic banks are based on the basic traditional banking operations and products, and banks need to diversify their business activities to reduce failure risk and preserve the banking sector’s stability.Originality/valueThis paper tries to bridge the gap by studying the impact of competition on bank performance in high-income dual banking Gulf Cooperation Council (GCC) economies. Earlier studies have either covered all the dual banking economies or the Middle East and North African region. The authors suggest that the GCC banking market is required to be studied separately because of its idiosyncrasies. Second, unlike earlier studies, the authors have not only examined the impact of competition on bank return but also on bank risk.