The Effects of Bank Regulation on Financial Development in the MENA Countries: The Supporting Role of Supervision

Abstract

T his study investigates the impact of bank regulation on financial development in the MENA countries for the period 1995-2014. Restrictions on activity, foreign banks, and capital were used as proxies for bank regulation. Also, bank supervisory power, independence, private monitoring, and moral hazard were used as proxies for bank supervision. Liquid liabilities, private credit, and z-score were chosen as proxies for financial development. They represent, consecutively, size, activity, and stability of the financial sector. A positive and significant impact of bank regulation was observed on all measures of financial development. The most important contribution of the present study is that, it gives evidence of an important supporting role of supervision on bank regulation, to realize its desired impact on financial development. This final result is important for the MENA countries, since data analysis shows that financial sector reform is more concentrated on regulation than supervision. Policy makers in the MENA countries need to focus more, in their financial sector reform, on bank supervision to realize the expected impact of bank regulation on financial development.