Middle East And North Africa Banks Research Articles

A path to success: educational board diversity and its influence on MENA banks’ efficiency and stability

Purpose This paper aims to examine how the diversity of educational levels within bank boards influences the efficiency and stability of banks operating in the Middle East and North Africa (MENA) region. Unlike previous studies, this analysis also investigates the role of board gender diversity in moderating the relationship between board educational level diversity and bank efficiency and financial stability in MENA. Design/methodology/approach In this study, a sample of 77 banks in the MENA region spanning the years 2011 to 2018 is used. The relationship between the presence of highly educated directors on the board, bank efficiency and stability is assessed using the ordinary least squares method. Additionally, the authors use the Generalized Method of Moments technique to correct endogeneity problem. Findings This study establishes a positive association between the presence of directors with advanced educational backgrounds on bank boards and bank efficiency and stability. Furthermore, the inclusion of women on the board strengthens this relationship. Practical implications These findings have important implications for policymakers and regulators in the MENA region, suggesting that promoting diversity policies that encourage the participation of highly educated directors on bank boards can contribute to enhanced efficiency and financial stability. Policymakers may also consider implementing quotas or guidelines to improve gender diversity in board appointments, thereby fostering bank performance in the region. Originality/value This study stands out for its innovation and distinctiveness, as it delves into the connection between board educational level diversity and bank efficiency in the MENA region. Notably, it surpasses previous research by investigating the moderating role of board gender diversity, thus offering valuable insights into the complex interplay between these two facets of board diversity. This contribution enriches the existing literature by providing novel perspectives on board composition dynamics and its influence on bank efficiency and stability.

Mediating effect of ESG performance on executive incentive compensation-financial performance relationship: evidence from MENA banking sector

PurposeThis study aims to investigate whether integrating environmental, social and governance (ESG) practices mediates the relationship between executive incentive compensation and the financial performance of Islamic and conventional banks in the Middle East and North Africa (MENA) region.Design/methodology/approachThis study used multiple regression models to analyze the effectiveness of ESG practices as a mediating variable in explaining the relationship between executive incentive compensation and banks’ financial performance between 2015 and 2021. The sample consisted of 57 Islamic and conventional banks operating in the MENA region, and the data were collected from the Thomson Reuters database (Data Stream).FindingsThis research paper showed the positive and significant mediating effect of the ESG practice on Banks’ financial performance. Thus, banks’ financial and stock market profitability is influenced by ESG information disclosure. This finding shows that taking ESG into account improves the relationship between executive incentive compensation and banks’ financial performance.Practical implicationsThe results may interest academic researchers, regulators and policymakers and would support stakeholders and decision-makers who wish to discover how executive incentive compensation affects financial performance in banks.Originality/valueThis study contributes to previous literature by studying the mediating effect of ESG practices on the relationship between executive incentive compensation and banks’ financial performance. Indeed, the originality of this research paper is justified by the scarcity of studies and, to the best of the authors’ knowledge, constitutes one of the first attempts to examine this relationship via a mediating variable, i.e. ESG.

The impact of bank capital, liquidity and funding liquidity on sustainable bank lending: Evidence from MENA region

This research analyzes the impact of bank capital, liquidity and funding liquidity on sustainable bank lending in the Middle East and North Africa (MENA) region. An unbalanced panel dataset covering 55 banks using ESG scoring criteria from 2010–2020 was employed for this purpose. Results indicate that higher capital and liquidity ratios hinder the MENA banking sector’s ability to improve its sustainable lending capacity. Funding liquidity has a positive and significant effect on sustainable bank lending growth, which suggests that funding liquidity raises sustainable bank lending capacity. Furthermore, the impact of funding liquidity on sustainable bank lending growth remains positive and statistically significant to all capital ratios. It implies that bank capital improves the relationship between funding liquidity and banks’ capacity to issue loans in the MENA region. Finally, the results of too-big-to-fail banks indicate that bank lending growth is positively affected by higher capital ratios. Hence, it may help them to increase their capacity to issue sustainable bank loans in the market. Overall the results are robust to principal component analysis and other estimation techniques like bootstrapped-based bias correction fixed effects.

Bank Capital, Risk and Profitability: A Comparative Study of Europe and Mena Countries

The purpose of this paper is to investigate the role of capital regulations in relation to bank risk and profitability across two different regions i.e. Europe and the Middle East and North Africa (MENA). The sample for this study includes annual data of 502 banks from European and MENA banking sectors for the period 2010-2019. The study employs OLS regression to ascertain whether Basel and non-Basel based capital ratios affect bank risk and profitability across different economic regions. The study also used Generalized Method of Moments and Limited Information Maximum Likelihood to remove the issue of possible endogeneity problems. The results show bank capital ratios comprises of risk-weighted assets are more effective in minimizing credit default risk and increasing profitability of banks in the European and MENA regions. Moreover, findings imply that complying with Basel capital guidelines do not penalize bank activities in one region compared to another. Overall results imply that bank regulators in both regions should make policies in compliance with Basel (III) capital guidelines to achieve financial stability.

Are financial inclusion and bank stability friends or enemies? Evidence from MENA banks

ABSTRACT This study investigated the effect of financial inclusion on bank stability in the Middle East and North Africa (MENA) region. To achieve this goal, we used a sample of MENA banks for the 2004–2017 period, and we performed system-generalized method of moments (SGMM) as an empirical approach. Overall, the empirical findings indicate that greater financial inclusion significantly increases bank stability. As bank specifics, we found that bank stability is more sensitive to an increase in the non-performing loans (NPLs) ratio and bank size. However, a sufficient level of liquidity significantly increases bank stability. Finally, the results show that bank stability could benefit from a stable macroeconomic environment.

FDI inflows and bank deposits: evidence from 18 MENA economies

PurposeThis paper aims to examine and compare the impact of foreign direct investment (FDI) inflows on bank deposits in aggregate as well as at the level of conventional and Islamic banks in Middle East and North Africa (MENA) countries. The study also tests hypotheses of direct and indirect impacts of FDI flow and FDI stock on bank deposits.Design/methodology/approachStatic and dynamic panel generalized methods of moments (GMM) estimation techniques are applied to analyze a large data set of 491 commercial banks (422 conventional banks and 69 Islamic banks) across 18 MENA countries between 1993 and 2017 (12,275 year observations).FindingsEmpirical results indicate that inflowing FDI flow and FDI stock have a significant negative direct impact on deposits of MENA banks. The results lend support for the direct channel hypothesis for the effect of FDI on bank deposits and find no evidence in support of the indirect channel hypothesis. FDI inflows affect bank deposits directly via increased FDI-related excessive competition in the banking market. Deposits from conventional banks appear to be more affected than those from Islamic banks. The variation may due to the fact that Islamic banks have fewer multinational corporations (MNC) customers than conventional banks and therefore are less sensitive to fluctuations in FDI.Practical implicationsFrom this analysis, this study concludes that foreign investments have a higher productivity than local investments in MENA region. Attracting more FDI is aimed at increasing overall national productivity through competition. However, governments would be wise to enact such a policy to maximize benefits and minimize potential harm to local industry. Furthermore, FDI policy should encourage small to medium-size banks and firms (SMEs)’ participation and linkage with multinational banks and MNCs, while upgrading research and development institutions and innovation activities to help SMEs to benefit from potential spillovers from foreign presence in the industry. In addition, the linkage and connection between SMEs and foreign firms should be strengthened and promoted by government policy.Originality/valueThis study is the first of its kind to examine the effect of FDI inflows on bank deposits. It also provides an in-depth quantitative analysis of the impact of FDI flow and FDI stock, separately, on bank deposits for both conventional and Islamic banks. It distinguishes between direct and indirect channels through which FDI inflows may affect bank deposits. The study analyzes 25 years of panel data for 491 banks (12,275 year observations) and uses both static and dynamic panel GMM estimation techniques to analyze the data.

Multiple large shareholders and bank stability: the case of MENA banks

PurposeThis study aims to investigate how multiple large shareholders individually and interactively influence Middle East and North Africa (MENA) bank stability.Design/methodology/approachThe empirical framework is based on a generalized dynamic two-step system and utilizes the method of moments estimation to analyze a panel dataset of 532 bank-year observations over the 2004–2017 period.FindingsThe estimation results show that large shareholders are crucial in explaining the differences in bank stability among MENA banks. Specifically, the first- and second-largest shareholders exacerbate bank instability. However, we found that the third-largest shareholder enhances bank stability. Additionally, the coalition between the two largest shareholders increases the moral hazard problem in MENA banks and significantly decreases stability. Meanwhile, the interaction between the three largest shareholders is associated with a control contestability problem, which impels better bank stability. The results support the dispersion effect of multiple large shareholders in MENA countries.Originality/valueThe role of large shareholders in corporate governance is widely recognized. However, very little is known about the role and the real impact that multiple large shareholders may have on the banking sector. To the best of the authors' knowledge, this work is the first to analyze the relationship between multiple large shareholders and bank stability in the MENA region.

Trustworthiness, good governance and risk taking in MENA countries

This study investigates the role of trustworthiness and governance quality in banks’ risk-taking behavior, along with other bank-specific and country-specific variables commonly studied. By employing a dataset comprising 202 banks in 16 countries in the Middle East and North Africa (MENA) from 2011 to 2017 and a two-step generalized method of moments methodology, trustworthiness was tested directly in relation to risk-taking and indirectly through the quality of the channel of governance. Our results indicate that trustworthiness reduces risk-taking, whereas governance quality exacerbates the risk-taking behavior of MENA banks. However, the effect of trustworthiness on risk-taking changes with good governance, indicating the substitution effect of trust on risk-taking because of the existence of weak formal institutions in MENA countries. The study recommends significant policies that can be implemented to promote public trust and bank stability.

Does the quality of voluntary disclosure constrain earnings management in emerging economies? Evidence from Middle Eastern and North African banks

PurposeThis study aims to examine the influence of the quality of voluntary disclosure (QVD) on earnings management (EM) amongst a sample of commercial banks in the Middle East and North Africa (MENA) region.Design/methodology/approachUsing a sample of 1,060 bank-year observations for the period 2006–2015, this paper developed a three-dimensional framework to measure the QVD, which considers the quantity, spread and usefulness of the information. Furthermore, this study examines the QVD-EM nexus using an ordinary least squares regression model. This technique is supplemented with conducting an instrumental variable regression model and a two-stage least squares model to overcome the potential occurrence of endogeneity problems.FindingsThe findings suggest that QVD is negatively attributed to EM in the context of MENA banks. The findings also confirm that the quality of financial reporting is enhanced by QVD dimensions that were considered in the framework, leading banks to less engagement in EM practices. In contrast, the influence of the quantity dimension (level) of the disclosed information has an insignificant impact on EM, while the spread and usefulness dimensions of VD are negatively and significantly associated with EM in the region.Research limitations/implicationsAlthough the results are robust to various measurements and to the possible occurrence of endogeneity problems, there are a few limitations should be acknowledged, which provides opportunities for future research. For example, the sample size is relatively small due to data accessibility issues. Likewise, the findings of the research might not be appropriate for non-financial sectors. These limitations provide a good opportunity for future studies to expand on the research by covering other developing economies and, thereby, enriching the understanding offered by this study.Practical implicationsThis study offers several implications for bank managers, academics and policymakers. Firstly, it may help managers to appreciate the function and the importance of QVD in mitigating EM. Secondly, for academics, the study provides suggestive evidence on the impact of QVD on EM; however, future research may need to consider the role of morality and ethical behaviour across different environments in reducing excessive risk-taking and constraining earnings manipulation. Finally, it provides insights for policymakers and regulators to develop a framework or guidance that can help banks in providing high-QVD in the context of developing economies.Originality/valueThe study distinctively develops an innovative measurement for QVD using a new multi-dimensional model. This paper also bring new evidence on QVD complexity and its impact on EM practice from an under-researched developing context, namely, the MENA region.

Determinants of banks’ dividend payment decisions: evidence from MENA countries

Purpose This paper aims to investigate bank-specific determinants affecting the dividend policy of commercial banks listed in the Middle East and North Africa (MENA) region countries. Design/methodology/approach The study uses pooled and panel tobit and logit regression analyses based on 16-year unbalanced data with 1,593 firm-year observations collecting from 117 commercial banks listed in 11 MENA countries. Findings The results indicated that the main bank-specific factors affecting dividend payment decisions are bank size, profitability, capital adequacy, credit risk and bank age in the context of the MENA emerging markets. In addition, the analysis showed that the yearly dummy for the global financial crisis (2008–2009) has a significant negative effect, while the yearly dummy for the Arabic spring crisis (2010–2011) has no significant effect on the dividend payment decision of banks listed in the MENA region. Furthermore, the growth opportunity is not one of the key factors affecting dividend policies by banks in MENA emerging markets. Considering this information, it is reasonable to conclude that MENA region banks’ dividend decisions follow investment decisions. In other words, the dividend decisions and investment decisions are independent of each other. The findings support theories (hypotheses) of dividends such as residual, signalling, regulatory pressures, transaction cost and lifecycle. Research limitations/implications This study is restricted to a sample of one type of financial firm, conventional commercial banks listed in the MENA markets because of the problem of missing data and limited information on other financial firms for the same period, particularly Islamic banks. Moreover, the focus of this study was on factors that are considered bank fundamentals. However, ownership variables were not included in the study because of unavailability. Practical implications The results of this study have several important implications for banks’ dividend policymakers, regulators, analysts and investors. Dividend policymakers in MENA emerging markets seem to use residual dividend policy, in which they distribute dividends according to what is left over after all acceptable investment opportunities have been undertaken. These inconsistent, unstable dividend policy trends make it difficult for investors to predict future dividend decisions. Further, this practise may convey information to shareholders about a lack of positive future investment opportunities. This may negatively affect the share value of banks. Acquiring a broad understanding of the dividend behaviour of MENA banks enables regulators to take more effective regulatory actions to protect shareholders and depositors. Finally, the results of this study can help analysts and investors build their dividends predictions and investment strategies. Originality/value The banking sector plays a disproportionately large role in the development of emerging economies. Therefore, this study is one of the first to examine a large cross-country sample of MENA banks (117) for an extensive period (2000–2015). The study includes both the Global financial crisis and Arab uprising periods, including after the liberalization and recent economic reforms and structural changes in financial sectors across MENA countries.

Sustainability reporting and performance of MENA banks: is there a trade-off?

PurposeSustainability reporting has been widely adopted by firms worldwide given stakeholders’ need for more transparency on environmental, social and governance (ESG) issues. This study aims to investigate the relationship between ESG and bank’s operational (return on assets [ROA]), financial (return on equity [ROE]) and market performance (Tobin’s Q) in a group of emerging countries in the Middle East and North Africa (MENA) region.Design/methodology/approachThis study examines 59 banks listed on the stock exchanges of MENA countries over a period of 10 years (2008-2017). Only conventional banks with all data for at least two years are included in the sample. The core independent variable is ESG scores, and the dependent variables are ROA, ROE and Tobin’s Q. This study uses bank- and country-specific control variables to measure the relationship between sustainability reporting and bank’s performance.FindingsThe findings from the empirical results demonstrate a significant positive impact of ESG on performance and economic benefits to shareholders. However, the relationship between ESG disclosures varies individually; unlike the majority of published research, the authors found that social performance plays a negative role in determining bank’s profitability and value. Furthermore, the authors present evidence in support of the impact of bank- and country-specific factors in determining bank’s performance.Originality/valueTo the best of the authors’ knowledge, this is the first study to investigate the impact of sustainability reporting on banks’ performance in the MENA region. It provides evidence that questions the positive relationship between sustainability reporting and financial measures of performance.

Market structure, performance, and efficiency: Evidence from the MENA banking sector

This paper tests four related theories on the relationships among market structure, profitability, and efficiency using a stochastic frontier analysis and dynamic panel data for 201 banks in Middle East and North Africa (MENA) countries during the 2005–2012 period. The results show that neither the structure–conduct–performance hypothesis nor the efficient structure hypothesis holds in MENA countries. This finding has important implications, meaning that the performance of the financial sector can be obtained under competitive and efficient conditions without high levels of concentration. The evidence also supports the relative market power hypothesis, suggesting that banks with higher market share obtain higher profits by setting higher prices. Furthermore, we find that cost efficiency has a significant effect on bank profitability, but also there are still highly concentrated markets in which banks are less profitable and more inefficient, adversely affecting the competitiveness of the banking system.

A dynamic network DEA model for accounting and financial indicators: A case of efficiency in MENA banking

Middle East and North Africa (MENA) countries present a banking industry that is well-known for regulatory and cultural heterogeneity, besides ownership, origin, and type diversity. This paper explores these issues by developing a Dynamic Network DEA model in order to handle the underlying relationships among major accounting and financial indicators. Firstly, a relational model encompassing major profit sheet, balance sheet, and financial health indicators is presented under a dynamic network structure. Subsequently, the dynamic effect of carry-over indicators is incorporated into it so that efficiency scores can be properly computed for these three substructures. The impact of contextual variables related to bank ownership, its type, and whether or not it has undergone a previous merger and acquisition process is tested by means of a stochastic non-linear model solved by differential evolution, which combines bootstrapped Simplex, Tobit, Beta, and Simar and Wilson truncated regression results. The results reveal that bank type, origin, and ownership impact efficiency levels differently in terms of profit sheet, balance sheet, and financial health indicators, although the impact of culture and regulatory barriers seem to prevail at the country level.

MENA Banking Competitiveness in the New Era of Global Financial Crisis and Increasing Political Risk

This paper investigates competitive conditions and the role of institutional environment and political risk as revenue drivers of commercial banks in the Middle East and North Africa (MENA) region. In this paper, we examine an extended period (1999-2015) consist of political and economic unrest and transformation that includes the 2007 global crisis and the recent Arab uprising. The Panzar-Rosse model and Arrelano-Bond and System GMM methodologies have been employed to examine such issues. Our findings indicate that MENA banks are still operating under monopolistic competition conditions. With regards to political instability, bank revenues is negatively affected by such matter and policies that favour deregulation and a more inclusive role for all stakeholders in the banking system stimulate growth. The findings are beneficial in terms of valuable policy implications to structure the banking system of these countries optimally.

Capital buffers in Middle East and North Africa (MENA) banks: is market discipline important?

PurposeThe role of market discipline in influencing capital buffers has been debated in literature. Limited evidence on this score is available for Middle East and North Africa (MENA) countries. In this context, using data for 2001-2012, the paper aims to examine the role and relevance of market discipline in affecting capital buffer for MENA banks.Design/methodology/approachGiven the longitudinal nature of the data, the paper employs dynamic panel data techniques that take on board the potential endogeneity between the dependent and independent variables.FindingsThe analysis indicates that the disciplining effect of depositors in MENA banks on capital buffer occurs primarily through the quantity channel, although this behaviour differs for banks with high versus those with low buffers. In particular, bigger banks which typically have thin capital cushion are much less subject to market discipline, presumably owing to their too-big-to-fail status.Originality/valueThe analysis differs from the extant literature in three distinct ways. First, the paper examines the differential response of Islamic banks on capital buffers via market discipline. Second, several of these countries are primarily commodity exporters. Accordingly, the paper examines the behaviour of these countries with regard to market discipline. Third, how far did the global financial crisis impact bank capital buffer had not been explored in prior empirical research, an aspect that is addressed in this study.

Family Takaful in developing countries: the case of Middle East and North Africa (MENA)

PurposeThe purpose of this paper is to investigate the driving forces (economics and socio-demographic) that influence family Takaful demand in the Middle East and North Africa (MENA) region, using a sample of 15 countries from the MENA.Design/methodology/approachThe authors use multivariate analysis, bootstrapping and generalised method of moments techniques. They first examine a full model that combines all variables; second, a model that controls for product market factors; and finally, a model that controls for socio-demographic factors. They further separate all models into linear and log-linear demand functions.FindingsThe authors demonstrate that the relationship between the demand for family Takaful in MENA and Islamic banking deposits, education, dependency rate, female life expectancy and Muslim population is significantly positive. On the other hand, the significant factors that are inversely related to the demand for family Takaful in MENA are inflation, financial development and male life expectancy.Research limitation/implicationsThe crucial limitation of this study is the amount of data available in regards to the dependent variable, family Takaful contributions. Consequently, to improve the understanding in explaining the family Takaful demand in MENA, further research can take advantage of expanding the variables that were omitted in this research as a consequence of the unavailability of data. Some of the possible influential variables can include government social security expenditure, legal system and government policies, price of Takaful and level of competition within the Takaful and insurance industry.Originality/valueIt is obvious that there are very few studies that focus on the MENA market, and indeed, none of them gives attention to the factors that influence demand for family Takaful. While this study is expected to provide more understanding and awareness on the concept of Takaful and the factors that influence its demand, the authors hope that it would encourage more studies on various issues on the Takaful industry so as to help researchers to understand more aspects of this new emerging business.

Vulnerability and profitability of MENA banking system: Islamic versus commercial banks

Purpose This paper aims to compare Islamic and commercial banks in the region of Middle East and North Africa (MENA) in terms of profitability and stability. Design/methodology/approach The study combines both the descriptive and analytical approaches. It considers panel data sets and adopts panel data econometric techniques. Findings The determinants of banks profitability and stability are different according to bank’s type. The results show that Islamic banks are more profitable than commercial banks, while on the other hand, commercial banks are more stable than Islamic banks. It is also concluded that banks profitability and stability are determined through some bank’s characteristics variables and macroeconomic variables in addition to the financial crises. MENA commercial and Islamic banking was affected by the financial crises in terms of profitability and stability. Additionally, larger banks are more stable than smaller banks, and off-balance sheet activities increase banks’ vulnerability for both commercial and Islamic MENA banks. Research limitations/implications The most prominent limitation is the lack of data, as we had to exclude some variables because of missing observations. As a result, the authors could not use data envelopment approach and stochastic frontier approach to evaluate banks efficiency in MENA countries rather than the financial ratios. Practical implications Commercial banks need to enhance their capitalization to improve their profitability. Additionally, Islamic banks need to improve the risk assessment and adopt some of the available risk management tools. Moreover, the banking system should take advantage of relatively higher Islamic banks profitability and use the unexploited profit opportunities through spreading into those countries with limited availability, such as the North African countries. Originality/value This study address both banks profitability and stability in an emerging region that includes banks of different types (Islamic and commercial) which are located in different counties that allows accounting for operational and institutional differences.

Capital structure and performance of Middle East and North Africa (MENA) banks: an assessment of credit rating

The firm’s credit rating is an important communication tool and previous research has shown that many companies consider it important in capital structure decisions. This study examines the determinants of capital structure in MENA banks. In addition, it investigates the determinants of credit rating. Further, the impact of credit rating and capital structure on banks’ performance is examined. Therefore, this study is an attempt to answer the following questions: 1) what are the main determinants of capital structure? 2) how does credit rating affect capital structure? 3) what are the main determinants of credit rating? and 4) what is the effect of capital structure and credit rating on bank performance? The sample covers 169 banks and is divided into two sub-samples: rated (79) and non-rated banks (90). The results indicate that credit rating directly affects the capital structure decisions as rated banks use more debts than non-rated banks. Banks’ performance is positively associated with credit rating and negatively with the capital structure. This study has an implication on investors in their decisions to invest in the banking industry. It also helpful for policy makers to understand how bank’s capital structure behaves so they could take it into consideration when issuing new regulations such as Basel

The Nexus between Economic Freedom and Islamic Bank Profitability in the MENA Banking Sectors

The study examines the impact of economic freedom on Islamic banks’ profitability in the Middle East and North Africa (MENA) banking sectors during the period 2000–2010 using dynamic panel model. The findings suggest that greater financial freedom positively influences the profitability of Islamic banks in the MENA banking sectors, implying that lower intervention in the system increases Islamic banks’ profitability. Furthermore, the larger, more diversified and better-capitalized Islamic banks are relatively more profitable, while credit risk and expenses preference behaviour negatively impact on Islamic bank profitability as expected.

Efficiency and bank profitability in MENA countries

This study compares accounting-based and economic-based measures of efficiency and profitability of banks in ten Middle East and North Africa (MENA) countries. Accounting variables help explain cost and profit efficiency, but cost efficiency has little impact on profitability and profit efficiency. Our results suggest that researchers perhaps should focus more on profit efficiency than cost efficiency. MENA banks are slightly less cost efficient than European banks, but similar to banks in developing economies. However, MENA banks score well in terms of profit efficiency relative to banks world-wide. Finally, almost all banks in the MENA region are below optimal size.