Determinates of profitability in Middle East and North Africa Banks
Proposal
1.1 Background
The financial sector in the Middle East and North Africa (MENA) economies is generally still in the early stages of development. Capital markets in these countries are neither efficient nor well-developed and in many cases are almost non-existent, whilst their financial sector is still dominated by the banking industry (Turk-Ariss, 2009; Abuzayed et al., 2012). In this context, commercial banks in MENA play a leading role in providing funds to private and public investment projects and financing government deficits. Since the 1980s, the financial and banking sector in MENA countries has experienced a transition period in response to the supervisory reforms intending to improve profitability and efficiency of the banking industry as well as to stimulate competition within the sector. Consequently, MENA has not gained the full benefits of globalization and many MENA countries suffer from some of the highest unemployment rates in the world. Besides, these countries will need external support to meet their financing requirements. Therefore, defining factors that enhance the profitability of banks in MENA countries and investigating whether profitability is a matter of dominant position of a company and to provide a better understanding of the drivers of profitability to be effectively used mong regulators to safeguard the financial sector and the whole economy.
1.2 literature review and research question
This study examines the determinants of MENA commercial banks profitability in the context of Structure-Conduct-Performance (SCP) hypothesis and the Efficiency hypothesis (EH). In the literature, bank profitability is usually expressed as function of internal and external factors. The internal factors could be termed micro or bank-specific factors, whilst, external factors are variables associated with economic, market structure and legal environment that affect a performance of banks. The persistence of bank profit is particularly driven by bank-specific and industry characteristics, and macroeconomic condition. The theories in respect to capital and profitability as well as bank size and profitability have been examined by several studies literatures (Demirgue-kunt and Huizinga, 1999; Pasiouras F and Kosmidou K, 2007; Kosmidou K, 2008; Sufian, 2012; Trujillo-Ponce, 2013; Sufian, 2009) finding a positive relationship between capital and profitability. Additionally, Alexiou and Sofoklis (2009) investigated the impact of bank-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional structure-conduct-performance (SCP) hypothesis. Findings of this study show that most of the bank-specific determinants were found to significantly affect bank profitability. Overall, the above arguments show that bank performance is influenced by internal and external factors; the research question or hypothesis is formulated as follows:
Study hypothesis: Bank profitability in MENA is affected by bank specific and external factors.
or
Do bank specific variables and external variables affect the MENA bank profitability?
1.3 The importance and contribution of the study
Firstly, investigating determinants of profitability in of MENA banks is crucial in terms of policy implications to optimally structure the banking system of these countries, Second, research on profitability of the banking industry in MENA countries is not as common as research from Europe, United States and Canada. Additionally, it is believed this study is the first of this kind to cover a large sample of 11 MENA countries for an extended and recent period (14 years).
1.4 Methodology and Data
This study examines a sample of banks (50 banks) for an extensive fourteen years (1999-2012) period that includes the 2008 global crisis period that enables the researcher to draw reliable conclusions using panel regression analysis.
1.5 Research structure
The structure of this study is organised as follows. Chapter one will be the introduction and background. Chapter two presents literature review for profitability of the banking sector. Whilst, chapter three outlines methodology and method that will be used to test the study hypothesis. Chapter four will discuss the findings of study and finally chapter five will the conclusion.
References List