Examining the Impact of Governance, Macroeconomic and Political Risk Determinants on Banks’ Efficiency

Abstract

The purpose of the paper is to examine the efficiency of the banking sector in the MENA region from 2006–2016. It considered both endogenous and exogenous factors, noting governance, macroeconomic, and political risk. A stochastic frontier analysis was initially applied without considering the exogenous factors. The macro-determinants factors were examined in the second stage by examining their impact on cost and profit efficiency. The findings of the investigation indicate that cost efficiency is negatively impacted by government effectiveness as reflected by bureaucratic quality, while inflation and government effectiveness positively affect cost efficiency. On the other hand, political stability and the absence of violence positively impacted profit efficiency. This reveals that total cost is a better proxy measure than net income to indicate how the level of banks’ efficiency is affected by macroeconomic and political risk variables. The paper presents new empirical findings on the efficiency of banks while taking into account the impact of governance, macroeconomic, and political risk determinants in a single study.