Competition and Profitability of Banks: Empirical evidence from the Middle East & North African (MENA) Countries

Source:
By:Syed Moudud-Ul-Huq, Md. Abdul Halim, Tanmay Biswas

DOI: https://doi.org/10.30564/jbar.v3i2.1807

Abstract:

This paper uses generalized method of moments (GMM), Least Squares (LS) and Generalized Linear Model (GLM) to examine the impact of competition on profitability of banks and Stochastic Frontier approach (SFA) is used to estimate of cost efficiency. We have used an unbalanced panel dataset from a sample of emerging economic MENA countries over the period between 2011 and 2017. We find out that have a significant and negative impact of competition on profitability of banks. The empirical findings of this study suggest that (1) MENA banks should more improve the process of managing and monitoring the loan segment business ; the result which reducing in the level of credit risk which leads to higher profitability (2) MENA banks should shrink higher level of banking sector development. (3) MENA banks should make full conduct of available funds to engage in various natures of businesses; if there is an issue of insolvency, robust government support would give protection to MENA banks. Finally, it also provides some compulsory policy implications which will be very much beneficial for a wide range of stakeholders.

References:

[1]Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D.. Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 2008, 18(2): 121-136. [2]Beck, T., De Jonghe, O., & Schepens, G.. Bank competition and stability: Cross-country heterogeneity. Journal of financial Intermediation, 2013, 22(2): 218- 244. [3]Berger, A. N.. The profit-structure relationship in banking--tests of market-power and efficient-structure hypotheses. Journal of money, credit and banking, 1995, 27(2): 404-431. [4]Berger, A. N., Klapper, L. F., & Turk-Ariss, R.. Bank competition and financial stability. Journal of Financial Services Research, 2009, 35(2): 99-118. [5]Berger, A. N., Klapper, L. F., & Turk-Ariss, R.. Bank competition and financial stability Handbook of Competition in Banking and Finance: Edward Elgar Publishing, 2017. [6]Demirgüç-Kunt, A., & Huizinga, H.. Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 1999, 13(2): 379-408. [7]Dietrich, A., & Wanzenried, G.. Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 2011, 21(3): 307-327. [8]Falzon, J.. Bank Performance, Risk and Securitisation: Springer, 2013. [9] Fernández, R. O., & Garza-García, J. G.. The relationship between bank competition and financial stability: a case study of the Mexican banking industry. Ensayos Revista de Economía (Ensayos Journal of Economics), 2015, 34(1): 103-120. [10] Fiordelisi, F., & Mare, D. S.. Competition and financial stability in European cooperative banks. Journal of International Money and Finance, 2014, 45, 1-16. [11] Fu, X. M., Lin, Y. R., & Molyneux, P.. Bank competition and financial stability in Asia Pacific. Journal of Banking & Finance, 2014, 38: 64-77. [12] García-Herrero, A., Gavilá, S., & Santabárbara, D.. What explains the low profitability of Chinese banks? Journal of Banking & Finance, 2009, 33(11): 2080- 2092. [13] Goddard, J., Molyneux, P., & Wilson, J. O.. Dynamics of growth and profitability in banking. Journal of money, credit and banking, 2004a: 1069-1090. [14] Goddard, J., Molyneux, P., & Wilson, J. O.. The profitability of European banks: a cross-sectional and dynamic panel analysis. The Manchester School, 2004b, 72(3): 363-381. [15] Gupta, A. D., & Moudud-Ul-Huq, S.. Do competition and revenue diversifcation have significant effect on risk-taking? Empirical evidence from BRICS banks. International Journal of Financial Engineering, 2020, 7(1). DOI: https://doi.org/10.1142/S2424786320500073 [16] Kanas, A., Hassan Al-Tamimi, H. A., Albaity, M., & Mallek, R. S.. Bank competition, stability, and intervention quality. International Journal of Finance & Economics, 2019, 24(1): 568-587. [17] Kasman, A., & Carvallo, O.. Financial stability, competition and efficiency in Latin American and Caribbean banking. Journal of Applied Economics, 2014, 17(2): 301-324. [18] Kasman, S., & Kasman, A.. Bank competition, concentration and financial stability in the Turkish banking industry. Economic Systems, 2015, 39(3): 502- 517. [19] Kim, J.. Bank competition and financial stability: Liquidity risk perspective. Contemporary Economic Policy, 2018, 36(2): 337-362. [20] Liu, H., Molyneux, P., & Wilson, J. O.. Competition and stability in European banking: a regional analysis. The Manchester School, 2013, 81(2): 176-201. [21] Louhichi, A., Louati, S., & Boujelbene, Y.. Market-power, stability and risk-taking: an analysis surrounding the riba-free banking. Review of Accounting and Finance, 2019, 18(1): 2-24. [22] Menicucci, E., & Paolucci, G.. The determinants of bank profitability: empirical evidence from European banking sector. Journal of financial reporting and Accounting, 2016. [23] Molyneux, P., & Thornton, J.. Determinants of European bank profitability: A note. Journal of Banking & Finance, 1992, 16(6): 1173-1178. [24] Moudud-Ul-Huq, S., Zheng, C., & Das, A.. Does bank corporate governance matter for bank performance and risk-taking? New insights of an emerging economy. Asian Economic and Financial Review, 2018, 8(2): 205-230. [25] Moudud-Ul-Huq, S., Zheng, C., Gupta, A. D., Hossain, S. K. A., & Biswas, T.. Risk and Performance in Emerging Economies: Do Bank Diversification and Financial Crisis Matter? Global Business Review, 2020, 1-27. DOI: 10.1177/0972150920915301 [26] Moudud-Ul-Huq, S.. Does bank competition matter for performance and risk-taking? empirical evidence from BRICS countries. International Journal of Emerging Markets, ahead-of-prin(ahead-ofprin),2020. DOI: https://doi.org/10.1108/IJOEM-03-2019-0197 [27] Moudud-Ul-Huq, S.. Can BRICS and ASEAN-5 emerging economies benefit from bank diversification? Journal of Financial Regulation and Compliance, 2019a, 27(1): 43-69. [28] Moudud-Ul-Huq, S.. The Impact of Business Cycle on Banks’ Capital Buffer, Risk and Efficiency: A Dynamic GMM Approach from a Developing Economy. Global Business Review, 2019b, 0972150918817382. [29] Moudud-Ul-Huq, S.. Banks’ capital buffers, risk, and efficiency in emerging economies: are they counter-cyclical? Eurasian Economic Review, 2019c, 9(4): 467-492. [30] Moudud-Ul-Huq, S., Ashraf, B. N., Gupta, A. D., & Zheng, C.. Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies? Research in International Business and Finance, 2018, 46: 342-362. [31] Naceur, S. B., & Omran, M.. The effects of bank regulations, competition and financial reforms on MENA banks’ profitability. Paper presented at the Economic Research Forum Working Papers, 2008. [32] Ozili, P. K.. Banking stability determinants in Africa. International Journal of Managerial Finance, 2018, 14(4): 462-483. [33] Rakshit, B., & Bardhan, S.. Does bank competition promote economic growth? Empirical evidence from selected South Asian countries. South Asian Journal of Business Studies, 2019, 8(2): 201-223. [34] Smirlock, M.. Evidence on the (non) relationship between concentration and profitability in banking. Journal of money, credit and banking, 1985, 17(1): 69-83. [35] Sufian, F.. Determinants of bank profitability in a developing economy: empirical evidence from the China banking sector. Journal of Asia-Pacific Business, 2009, 10(4): 281-307. [36] Sufian, F., & Habibullah, M. S.. Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector. Frontiers of Economics in China, 2009, 4(2): 274-291. [37] Tan, Y.. The impacts of risk and competition on bank profitability in China. Journal of International Financial Markets, Institutions and Money, 2016, 40: 85- 110. [38] Tan, Y.. The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry. The North American Journal of Economics and Finance, 2017, 42: 89-106. [39] Tan, Y.. Competition and Profitability in the Chinese Banking Industry: New Evidence from Different Ownership Types. Journal of Industry, Competition and Trade, 2019: 1-24. [40] Tan, Y., & Floros, C.. Risk, profitability, and competition: evidence from the Chinese banking industry. The Journal of Developing Areas, 2014: 303-319. [41] Tan, Y., Lau, M. C. K., & Gozgor, G.. Competition and Profitability: Impacts on Stability in Chinese Banking. International Journal of the Economics of Business, 2020: 1-24. [42] Tregenna, F.. The fat years: the structure and profitability of the US banking sector in the pre-crisis period. Cambridge Journal of Economics, 2009, 33(4): 609-632. [43] Zheng, C., & Moudud-Ul-Huq, S.. Banks’ capital regulation and risk: Does bank vary in size? Empirical evidence from Bangladesh. International Journal of Financial Engineering, 2017, 4(02n03): 1750025. [44] Zheng, C., Moudud-Ul-Huq, S., Rahman, M., & Ashraf, B.. The effects of ownership structure on banks’ capital and risk-taking behavior: empirical evidence from developing country. Research in International Business and Finance, 2017, 42: 404-421. [45] Zopounidis, C., & Kosmidou, K.. The determinants of banks’ profits in Greece during the period of EU financial integration. Managerial finance, 2008.