The main focus of this paper is the study of efficiency in the Middle Eastern and North African (MENA) banking industries throughout the period 1999-2017. The study of efficiency in many other regions reveals the existence of failures in the allocation of resources for banking sectors which results in the appearance of banking inefficiency in terms of cost. The empirical results, using a parametric cost frontier applied, show a fluctuating yet improving efficiency in the MENA and are used to rank efficiency of banking industries by country over the years (1999- 2017). Promoting a strong and stable banking system reduces uncertainties and systemic risk which leads to greater efficiency. A stable and efficient banking system is then, necessary, for economic development. Since 1990s, and due to reforms required by supervisory authorities, banks in the MENA region have faced many structural changes and have tried to develop their activities by seeking to enter new markets and new sectors of activity in order to adapt to the economic and institutional environment changes by adopting internal and / or external growth strategies. These strategies can increase banks market power and diversify banking industries’ activities in order to achieve efficiency gains.

This study explores the impact of main idiosyncratic endogenous (Capital ratio, Diversification, Liquidity, Return on equity (ROE), Banks assets’ size) and macroeconomic exogenous (Inflation rate, GDP growth rate and HHI concentration index) determinants of the banking firm that influence banks’ cost efficiency. Using the SFA (Stochastic Frontier Approach) we estimate cost efficiency of the MENA banking sectors through a two-stage model: i) Including idiosyncratic and macroeconomic factors at a first stage under SFAW (SFA With) and ii) excluding these factors under SFAWO (SFA without) at a second stage. By using this method, SFAW versus SFAWO, we compare between the efficiency frontiers and scores obtained and understand the effect of the integration of main determinants on efficiency of banks in the MENA region. Using a sample of 240 observations for MENA banks collected from 18 banking sectors, we analyze whether these criteria had impact on cost efficiency throughout 1999-2017. We find that SFAW scores of efficiency are higher than SFAWO. Furthermore, our results show clearly the impact of determinants selected on cost efficiency frontier. Finally, notwithstanding ongoing fundamental changes in MENA’s banking industries, the empirical results, show that these inefficiencies can be explained by the idiosyncratic factors (Assets ‘size, liquidity, profitability, etc.) which are under the control of bank managers and the macroeconomic environment (economic growth, inflation) which largely depends on the economic, monetary and financial policies adopted in each country of the MENA region.