Vulnerability and profitability of MENA banking system: Islamic versus commercial banks

Purpose - This paper aims to compare Islamic and commercial banks in the region of Middle East and North Africa (MENA) in terms of profitability and stability. Design/methodology/approach - The study combines both the descriptive and analytical approaches. It considers panel data sets and adopts panel data econometric techniques. Findings - The determinants of banks profitability and stability are different according to bank's type. The results show that Islamic banks are more profitable than commercial banks, while on the other hand, commercial banks are more stable than Islamic banks. It is also concluded that banks profitability and stability are determined through some bank's characteristics variables and macroeconomic variables in addition to the financial crises. MENA commercial and Islamic banking was affected by the financial crises in terms of profitability and stability. Additionally, larger banks are more stable than smaller banks, and off-balance sheet activities increase banks' vulnerability for both commercial and Islamic MENA banks. Research limitations/implications - The most prominent limitation is the lack of data, as we had to exclude some variables because of missing observations. As a result, the authors could not use data envelopment approach and stochastic frontier approach to evaluate banks efficiency in MENA countries rather than the financial ratios. Practical implications - Commercial banks need to enhance their capitalization to improve their profitability. Additionally, Islamic banks need to improve the risk assessment and adopt some of the available risk management tools. Moreover, the banking system should take advantage of relatively higher Islamic banks profitability and use the unexploited profit opportunities through spreading into those countries with limited availability, such as the North African countries. Originality/value - This study address both banks profitability and stability in an emerging region that includes banks of different types (Islamic and commercial) which are located in different counties that allows accounting for operational and institutional differences.