Banking in the MENA region: The pro-active role of financial and economic freedom

Abstract

The main purpose of this paper is to check whether bank profitability benefits from bank diversification by considering the moderating role of the economic freedom (EF) and financial freedom (FF). This paper uses a sample of 83 conventional banks operating in the MENA countries over the period 2005–2020 and, performs an empirical approach based on the System Generalized Method of Moments (SGMM). To get a better understanding and reliable results on the impact of NII on bank profitability, we split the MENA region in two sub-regions. The first block contains the Gulf Cooperation Council (GCC) countries with a sample of 40 banks and, the second covers the non-GCC countries with a sample of 43 banks. Empirical findings of the aggregate analysis reveal that bank profitability is more sensitive to bank diversification and, benefits from more EF and FF. Furthermore, we found that the interaction between bank diversification, EF and FF negatively affects the level of profitability. The results of the disaggregated analysis confirm the same findings concerning the positive effect of EF and FF and the negative effect of the interactional relationship. However, the effect of bank diversification differs across the two sub-samples.