EMNES Working Paper 007

This paper represents the first study to examine convergence of bank competition in the Middle East and North Africa (MENA) and the impact of bank market power on growth. Using a sample from 16 countries over 2005-14 and forming macro-regions based on oil export allowances to capture intra-regional country differences, our results suggest that banking competition has increased over the period under investigation. In addition, using alternative tests, we find clear evidence of convergence in banking competition across the three macro-regions, as well as in MENA as a whole. Further, our results show that industrial sectors that are normally more dependent on external financing grow faster in countries characterised by greater financial development. Finally, our analysis of the impact on economic growth points to a positive and significant effect of bank market power on economic growth in two out of three macro-regions. This is in line with the relationship lending literature that suggests that in a competitive environment, banks will be less willing to avail finance to informationally opaque firms. A major implication of this analysis is that some degree of market power in the banking sector may be beneficial because it can improve lending availability and, hence, economic growth.

under review
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