Bank-specific and Macroeconomic Determinants of Profitability in Middle Eastern Banking

The main purpose of this research is to examine profitability determinants in the Middle Eastern banking systems. In particular, the impact of bank-specific and macroeconomic factors on bank profitability is examined. Using both the OLS and the GMM techniques, the results show the persistence of profit, confirming the dynamic character of the model specification. The crucial point is that the findings from the dynamic model confirm a non-linear relationship between size and profitability. Although no evidence is found in support of the traditional SCP hypothesis in the static model, the dynamic model confirms such hypothesis strongly. We also find that capital strength, liquidity, and efficiency are the main determinants of profitability. Off-balance-sheet activities reduce bank profits and the Middle Eastern banks don’t seem to anticipate inflation, meaning that the influence of inflation is negative for the Middle East at least for the period under consideration.