Is High Profitability of MENA Banks Due to the Existence of Monopolistic Conditions in the Sector?

Abstract

The study investigates the competitive conditions and profitability drivers of commercial banks in MENA region in the context of Panzar-Rosse model. It is the first study of its kind that examines a large sample of MENA banks (149 banks) for an extensive period (1999-2012) during an era of political and economic unrest, liberalisation and transformation of the region that includes the 2007 global crisis period. The extended period and sample provides the ability to draw reliable conclusions about the sector. We find that MENA banks operate under monopolistic competition, providing evidence that the profitability of the examined banks during this period is due to bank-specific factors rather than to monopolistic or oligopolistic conditions. Well-capitalised banks are found to have superior performance. However, we don’t find any support that bank size, foreign ownership or state ownership are significant. These empirical results have profound policy implications. Our findings indicate that policies that favoured relaxing capital adequacy requirements, decreasing state role and mergers in the banking sector of developing countries are not empirically justified for MENA countries during this period.

Keywords: Banks, Structure Conduct Performance, Competition, Profitability, Regulation, Deregulation, MENA economies

JEL Classification: C23, D41, E44, F12, F23, F36, G21, G28, F62, L41, L43, L51, M48, O16