Abstract
This article investigates the impact of capital requirements and market competition on the stability of financial institutions in the Middle East and North African (MENA) region. We test the hypothesis that capital requirements significantly affect the risk behaviour of both Islamic and conventional banks in the MENA region. We also investigate the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. We find that capital ratio has a strong positive impact on conventional banks’ credit risk, whereas this effect is insignificant in the sample of Islamic banks. Our analysis indicates that, for the conventional banking sector, the increase in the capitalization level is negatively linked to bank credit risk only when banks’ level of market power is high. Regarding the Islamic banks’ behaviour, we find that the relationship between capital and credit risk is weakly moderated by banking competition. This means that Islamic banks are less sensitive to the market’s competitive conditions in the MENA countries, as they still apply their theoretical models, based on prohibition of interest. Our findings inform regulatory authorities concerned with improving the banking sector’s financial stability in the MENA region to strengthen their policies and force banks to better align with regulatory capital requirements during the COVID-19 pandemic.
Highlights
This study investigates the impact of capital regulation and market competition on bank’s risk-taking in the countries that belong to the Middle East and North African (MENA) region
A study by Hamza and Kachtouli (2014) on conventional banks (CBs) and Islamic banks (IBs) in the MENA region indicates that a conventional market exhibits a high fragmentation or weak concentration, whereas a moderate concentration characterizes the Islamic banking market; the analysis indicates that the concentration of Islamic market has been declining since the year 2004
Most of the previous studies focusing on the MENA region examine the impact of market competition on credit risk only (Louati et al, 2015) or the banking system as a whole (González et al, 2017)
Summary
This study investigates the impact of capital regulation and market competition on bank’s risk-taking in the countries that belong to the Middle East and North African (MENA) region. Many countries’ regulatory authorities have shifted their focus on the development of new rules associated with stricter banking regulations and the establishment of a system of high-quality governance. In this context, capital requirements are considered as an essential element of prudential regulation in the light of the Basel Accords that may enforce banks to decrease their risk-taking level. Bitar et al (2016) examine the impact of various regulatory capital ratios on bank performance, using a sample of 168 banks in 17 MENA countries, and find that capital ratios are positively associated with loan loss reserve ratios, bank efficiency and profitability Their findings support the recommendations of the Basel Committee to hold higher capital ratios.
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