State Divestitures and Bank Performance: Empirical Evidence from the Middle East and North Africa Region

Abstract

Article History JEL Classification:G21, G34.The purpose of this study is to examine the relationship between privatization of stateowned banks and bank profitability, efficiency and risk in the MENA region using a sample of 36 privatized banks and 36 already private banks in eleven countries. With regards to the economic slowdowns and political instability in this region, the study results should be of interest to regulators, bank supervisors and policy makers studying the implications of bank reforms. Employing t-tests, country and time-fixed effects OLS regression and difference-in-differences analysis, the findings of this study conclude that banks in the MENA region have enhanced their cost efficiency and decreased their credit risk significantly after being privatized. Although, the study concludes that privatization improves bank cost efficiency and reduces risk, the effect on profitability remains inconsequential and debatable. This study proposes that bank privatization as a part of comprehensive reform programs should be supported in the MENA region to reduce the burden on state budget, and enhance managerial efficiency.Contribution/ Originality: This study uses new estimation methodology, the difference-in-differences (DID) analysis, to measure the effect of state divestitures on banking performance. Applying these exhaustive empirical methods result in: banks in the MENA region are able to meet benchmark performance by improving their cost efficiency and reducing risk of their loan losses.

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