Factors affecting net interest margin in the banking sector: Evidence from the Arab region

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Abstract

The net interest margin is an important measure for assessing the operational efficiency of the banking sector, and it also evaluates the performance of the bank’s management, as well as the success of its strategies in generating revenues through its core business (Obeid & Adeinat, 2017). In this paper, we examine the determinants of the net interest margin in the banking sector for selected Arab countries, including the cost-income ratio, the bank’s assets, the provisions, the main interest rate of the monetary policy, the real gross domestic product (GDP) growth rate, and the inflation rate, for a sample of 18 commercial banks in six Arab economies during the period 2015–2020. We use panel data models and the Hausman test to select the appropriate model. The results show that there is a significant positive effect of the bank size and the cost-to-income ratio on the net interest margin, while there is a negative impact of inflation, interest rates on monetary policy tools, and the coronavirus pandemic on the net interest margin. The results did not show a significant relationship between real GDP growth and loan provisions on the one hand, and the operational efficiency of the banking sector on the other hand.

Keywords: Net Interest Margin, Monetary Policy Instruments, Panel Data, Fixed Effects, Random Effects, COVID-19, Hausman Test

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G21

Received: 04.07.2023
Accepted: 01.02.2024
Published online: 05.02.2024

How to cite this paper: Obeid, R. (2024). Factors affecting net interest margin in the banking sector: Evidence from the Arab region. Journal of Governance & Regulation, 13(1), 214–222. https://doi.org/10.22495/jgrv13i1art19