Are competition and performance friends or foes? Evidence from the Middle East banking sector

Abstract

Purpose This paper aims to investigate the impact of banking market competition on banks’ profitability and banks’ risk using a sample of six countries from the Middle East from 2006 to 2017. Design/methodology/approach This paper uses the system generalized method of moments estimator to tackle potential omitted variable bias, endogeneity and simultaneity issues. Findings After controlling for bank market and country-specific characteristics, this study reports strong and robust evidence that competition in the banking market is conducive to lower financial performance. This research further finds that intense banking competition leads to lower profitability and increased risk regardless of bank type. As the relationship is not different for Islamic banks, one can argue that activities of Islamic banks are based on the basic traditional banking operations and products, and banks need to diversify their business activities to reduce failure risk and preserve the banking sector’s stability. Originality/value This paper tries to bridge the gap by studying the impact of competition on bank performance in high-income dual banking Gulf Cooperation Council (GCC) economies. Earlier studies have either covered all the dual banking economies or the Middle East and North African region. The authors suggest that the GCC banking market is required to be studied separately because of its idiosyncrasies. Second, unlike earlier studies, the authors have not only examined the impact of competition on bank return but also on bank risk.

Competitiveness in Banking Sector: A Systematic Literature Review

“…Yet, competition is positively associated with loan growth (Yang & Shao 2016) and social engagement (Forgione & Migliardo 2020). However, high competition negatively impacts bank profitability (Khattak & Ali 2021, Ho & Nguyen 2022 and the market capitalization of banks (Căpraru et al 2020).…”

Partnership attributes and partnership success in accounting firms: a conceptual perspective and further directions

“…Furthermore, inconsistencies are present concerning the findings on the linkage between competition and success of firms. While a number of researchers find a positive connection between competition and outcomes of firms (Bar-Isaac, 2005;Ferreira and Kittsteiner, 2015;Kuo, 2013), others (Khattak and Ali, 2021;Poulton et al, 2004) hold a contrary view. To offer instances on researchers who hold this contrary view, Poulton et al (2004) unveil that, higher degrees of competition are not essentially connected with improved performance of a system.…”

“…To offer instances on researchers who hold this contrary view, Poulton et al (2004) unveil that, higher degrees of competition are not essentially connected with improved performance of a system. Khattak and Ali (2021) show that intense competition leads to lower performance, profitability and increased risk. Ahinful et al (2023) demonstrate that intense competition can force companies to be innovative, and this can eventually lead to their success.…”

Competition, stability, and institutional environment: The case of dual banking economies

“…Similar results were reported by Khattak, Alaeddin, and Abojeib (2022). Khattak and Ali (2021), focusing on the banking sector of Middle Eastern countries, also conclude that the lower competitive conditions are better for banking stability. More importantly, these results hold for both types of banks.…”