Competition in the banking industry, is it beneficial? Evidence from MENA region
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ORIGINAL ARTICLE
Competition in the banking industry, is it beneficial? Evidence from MENA region Faten Zoghlami1 · Yassine Bouchemia2 Accepted: 30 August 2020 © Springer Nature Limited 2020
Abstract Using a sample of 197 commercial banks operating in the MENA region, this paper examines the impact of competition on bank profitability and risk-taking, during the period 2011–2018. To assess competition, we have used both market structurebased and non-market structure-based indicators. Results indicate that competition would impact differently banks’ profitability and risk-taking. On the one hand, an increase in competition seems to hurt banks’ net—interest margin and loan quality, but on the other hand, the competition seems to enhance banks’ ROA and ROE. In line with existing literature, we suggest that competition reduces interest-based income, and increases bank fragility, but it seems to enhance the development of new non-interest-based activities, improving hence the overall banks’ profitability. We argue that our findings would contribute to the current debate on the effectiveness of the deregulation reform initiated in several MENA countries and help to resolve the trading-off between competition and bank stability. Keywords Competition · Banks’ profitability · Lerner index · HHI · Banks’ risk-taking · MENA banking markets JEL Classification G21 · G28 · G31 · L1 · L16
Introduction While competition is unanimously accepted as a vector of efficiency in all sectors of the economy, it continues, however, to animate academic and political debates about its benefits in the banking industry. In particular, given the importance of the banking industry stability in achieving economic growth, and its related systemic risk, several academics, and banking authorities are doubtful about the relevance of competition in the banking market [58], and proponent of the idea that competition is detrimental for banks stability. In particular, they fear that a competitive environment could cause the fragility of the banking industry, which will spread to an economic crisis, as was highlighted by Allen and Gale [2].
* Faten Zoghlami [email protected] 1
ISCAE, LIGUE LR99ES24, University of Manouba, Campus Universitaire de Manouba, 2010 Manouba, Tunisia
ESC, LIGUE LR99ES24, University of Manouba, Campus Universitaire de Manouba, 2010 Manouba, Tunisia
2
In particular, banking authorities in the MENA region have usually supposed the correctness of this hypothesis linking competition to banks’ fragility. Hence, MENA banking markets have been long highly regulated and concentrated relative to many other countries. But, to be in line with the banking international standards, especially with the financial deregulation process, and the globalization of the financial markets that have begun since the 1970s, most of the MENA baking authorities were forced to initiate deregulatory reforms favoring more competitive banking market structures. See for example Elfeituri and Vergos [29] among others who have noted that ME
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