Navigating crisis: marketing dynamics and resilience in the MENA's dual-banking system amidst the SAR-COV-2 pandemic

The study investigates whether and how market concentration and operating efficiency shape bank profitability, stability, and capitalization in the MENA region’s dual-banking system (Islamic vs. conventional) before and during the SAR-COV-2 pandemic. Motivated by systemic vulnerabilities observed during COVID-19 and mixed evidence on the resilience of Islamic banks (IBs) relative to conventional banks (CBs), the paper addresses a gap in examining the joint roles of market concentration and efficiency, and in treating efficiency as a determinant (rather than an outcome) of profitability. Grounded in the efficient-structure (ES) and structure-conduct-performance (SCP) hypotheses, the study assesses whether concentrated markets and greater efficiency improve bank performance and whether effects differ by bank type during crisis conditions. The research is important for scholars and policymakers due to the MENA region’s increasing prominence of Islamic finance, differences in bank business models and risk management, and policy implications for post-pandemic recovery and financial stability.

Prior research offers mixed conclusions on IBs’ comparative performance and stability versus CBs, particularly during crises. Some studies find IBs more profitable, liquid, and better capitalized (Beck et al. 2013; Ben Khediri et al. 2015), while others suggest lower stability or weaker performance in crises relative to CBs. The ES hypothesis posits that efficiency leads to higher profits and market concentration; SCP suggests concentration enables market power and higher earnings. Evidence on efficiency-profitability is mixed across markets (e.g., positive in US/China/India and MENA-focused studies; negative in some European settings). Studies also examine efficiency as an outcome influenced by performance and market structure (e.g., Otero et al. 2020). Literature on COVID-19 indicates differential bank impacts; IBs’ resilience has been attributed to Shariah-compliant, asset-backed models, diversified funding, lower leverage, and risk-sharing, though results vary by country/bank. The role of market concentration and efficiency in dual-banking systems during COVID-19 remains underexplored. Hypotheses: H1a: Concentration and efficiency significantly influence MENA banks’ profitability; H1b: this effect is stronger for IBs and during SAR-COV-2. H2a: Bank stability is positively associated with concentration and efficiency; H2b: stronger for IBs and during SAR-COV-2. H3a: Concentration and efficiency are significantly correlated with banks’ capital ratios; H3b: stronger for IBs and during SAR-COV-2.

Data: Unbalanced panel of 575 banks (471 conventional, 104 Islamic) across 20 MENA countries, 2006–2021. Sources: Orbis BankFocus (BvD) for bank financials; banks’ annual reports; World Bank WDI for macro variables. Variables winsorized at 1%/99%. Models: Panel regressions with country and year fixed effects; FE/RE selection via Hausman test; robust errors. System GMM (one-step) used for robustness to endogeneity and dynamics; Sargan-Hansen and AR(2) tests reported. Additional robustness: alternative concentration (CR5), profitability (NIM, Tobin’s Q), crisis dummy (2020–2021), and 2SLS IV with lagged HHI. Dependent variables: Profitability: ROA, ROE; efficiency proxy in performance regressions: Cost-to-Income (C/I). Stability: log Z-score (distance to default, 5-year rolling), Multi-level Performance Score (MLPS), and Financial Stability Indicator (FSI). Capitalization: Capital Adequacy Ratio (CAR), Equity/Total Assets (E/TA), Total Capital Requirements (TCR). Key independents: Market concentration: Herfindahl-Hirschman Index (HHI), alternative CR5. Efficiency: Data Envelopment Analysis (DEA) efficiency scores using intermediation approach, with CRS, VRS, and SCALE (SCALE=CRS/VRS); average DEA efficiency used. Interaction: Efficiency×HHI to capture moderating effect of market structure. Controls (bank-level): loans/deposits, loans/total assets, non-interest income/TA, non-financial loan growth, liquid assets/TA, size (log assets), CAR, NPLs, leverage (equity/TA). Controls (macro): GDP growth, inflation, domestic credit to private sector (%GDP). GCC dummy included. Year and country fixed effects in all baseline models.

• Sample and scope: 575 banks in 20 MENA countries (2006–2021), dual-banking (Islamic and conventional), enabling pre-pandemic vs pandemic comparisons.
• Profitability (pre-pandemic, 2006–2019): For IBs, both market concentration (HHI) and efficiency significantly and positively influence profitability (ROA, ROE); for CBs, these effects are weaker/insignificant. Efficiency reduces C/I (higher cost efficiency) in both bank types.
• Profitability (pandemic, 2020–2021): Concentration and efficiency significantly affect CBs’ profitability (e.g., ROE), but are largely insignificant for IBs. The moderating term Efficiency×HHI is negative/marginal, implying greater competition strengthens the profitability impact of efficiency during crisis.
• Stability (pre-pandemic): Concentration and efficiency positively associate with Z-score and MLPS for both IBs and CBs; effects on FSI are weak/insignificant and sometimes opposite in sign, reflecting cross-country heterogeneity and NPL-related short-term risks.
• Stability (pandemic): Strong, significant positive effects of concentration and efficiency for IBs across Z-score, MLPS, and FSI; weaker/insignificant for CBs. The moderating effect Efficiency×HHI is negative and significant, indicating that efficiency supports stability more in less concentrated (more competitive) markets.
• Economic significance: A one-standard-deviation increase in concentration (~13%) is reported to raise bank stability by about 9.04% for CBs and 97.27% for IBs (based on estimated coefficients for Z-score models). Concentration impacts are economically relevant for MLPS; less so for FSI.
• Capitalization: Pre-pandemic, concentration and efficiency significantly influence capital ratios mainly for CBs. During the pandemic, concentration and efficiency increase CAR but reduce E/TA; effects are stronger for IBs. Market concentration’s moderating effect is negative during the pandemic, suggesting efficient banks in more competitive markets are better capitalized (notably among IBs).
• Non-interest income: During the pandemic, non-interest income is negatively related to capital ratios (CAR, E/TA, TCR), suggesting limited reliance on non-interest revenue to offset heightened risks. For profitability, non-interest income effects vary by bank type and period.
• Controls: Larger size generally associates with higher profitability and better aggregate stability measures. Higher NPLs reduce profitability and worsen cost efficiency; liquidity and loan growth have mixed impacts across models and periods. Macro variables (GDP growth, inflation, domestic credit) show limited and mixed significance.
• Robustness: Findings hold under alternative measures (CR5, NIM, Tobin’s Q), system GMM estimation, crisis-dummy interactions (which show profitability declines during pandemic and attenuated positive effects of concentration and efficiency), and 2SLS IV addressing potential endogeneity of concentration.

The results show that both market structure and operational efficiency are key drivers of bank performance and stability in the MENA region’s dual-banking markets, but their roles differ by bank type and crisis phase. Pre-pandemic, both IBs and CBs benefit in stability from concentration and efficiency, while profitability gains are clearer for IBs—consistent with ES/SCP channels and the distinct asset-backed, risk-sharing features of IBs. During the pandemic, stability benefits concentrate among IBs, indicating that IBs’ business models, stronger pre-crisis capitalization, and risk-sharing/asset-backed financing enhanced resilience to the COVID-19 shock. The negative moderating effect of concentration suggests competition amplifies the positive impact of efficiency on performance and stability, aligning with competition-stability arguments (competition can lower NPLs and improve resilience for efficient banks). The evidence challenges overreliance on traditional intermediation/interest-based income—particularly for CBs—given the negative association of non-interest income with capital ratios during crisis, and supports policy designs that foster efficiency, prudent consolidation, and adequate capital buffers, especially for IBs as engines of post-pandemic recovery.

This study is the first to jointly assess the roles of market concentration and efficiency for profitability, stability, and capitalization in MENA’s dual-banking system across the COVID-19 shock using both standard and aggregate stability measures (Z-score, MLPS, FSI). Main contributions: (1) Pre-pandemic, concentration and efficiency supported stability for both bank types and profitability particularly for IBs; (2) During the pandemic, these positive effects concentrated in IBs, reflecting their business model and capitalization advantages; (3) Competition negatively moderates the efficiency link—indicating efficiency pays off more in less concentrated markets—during crisis; (4) Concentration and efficiency raised CAR but reduced E/TA during the pandemic, with stronger effects for IBs; (5) Non-interest income reduced capital ratios, suggesting limited diversification benefits during crisis. Policy recommendations include promoting bank efficiency, cautious consolidation, stronger capital conservation buffers, and revisiting business models that rely heavily on intermediation/interest income (especially for CBs). Future research should extend the post-pandemic window and study additional moderators (ownership concentration, market size, liquidity) and other regions with significant Islamic finance presence.

The COVID-19 impact window is limited to two years (2020–2021), constraining long-term inference. Cross-country heterogeneity in institutions and pandemic responses may affect comparability. Stability results using FSI show sensitivity to country-level NPL dynamics and liquidity support availability for IBs. Future work should extend the period (e.g., include 2022+), examine additional moderators (ownership concentration, market size, liquidity), and replicate in other regions with prevalent Islamic banking.