Assessing the Direct and Moderating Effect of COVID-19 on the Performance of the Banking Sector in the MENA Region

Abstract

This article discusses the impact of the COVID-19 pandemic on the financial performance, credit risk and capital adequacy of the banks in the Middle East and North Africa (MENA) region, with the determinants of the banks’ financial performance before and during the pandemic investigated. The data were collected from the Orbis Bank Focus database and banks’ annual financial reports, with descriptive statistics, t-tests and multiple regressions employed to analyse the data. The results revealed that the pandemic negatively and significantly affected the financial performance of the banks, increasing the credit risk, but that it had no significant impact on capital adequacy. Furthermore, the findings indicated that the managerial efficiency, the bank’s size and the gross domestic product had a significant positive impact on the bank’s financial performance in both periods, while in contrast, the credit risk had a negative and significant impact on the banks’ financial performance. Finally, the liquidity risk, capital adequacy, inflation and oil prices had no significant impact on the banks’ financial performance. The findings of this study are important for the banks in the MENA countries given the uncertain future with the recurrent emergence of global crises. Overall, it is recommended that the banks implement strategies to control the credit risks and thus maintain their profitability during such crises.

Keywords

COVID-19 banks financial performance capital adequacy credit risk liquidity

Introduction

In 2008, the world encountered a global financial crisis (GFC) that affected almost every industry, including the banking sector. However, the COVID-19 outbreak of 2019 presented an unprecedented type of crisis in terms of nature, extent and speed (Song et al., 2020; Wen & Liao, 2021) and became the harshest test of the global financial system since the GFC (Zaremba et al., 2021). The world experienced an economic shock due to lockdowns, border closures, travel bans and a variety of new obstacles faced by various economic activities (Koutoupis et al., 2021). This has led to numerous closures at every level of commerce, industry and education (Almutairi, 2022), consequently slowing down the aggregate demand and supply, production, trading activities, savings, investments and economic actions, thus increasing both unemployment and poverty (Xie et al., 2021). In fact, every sector of the economy has been affected by the pandemic (El-Chaarani, 2021), triggering a period of recession or depression in several countries (Al-Ali, 2020).

Much like with the great depression of the early 1930s, the pandemic is expected to result in recurrent layoffs and bankruptcies (Alon et al., 2020). An increasing number of individuals—especially those with lower incomes—and firms may not meet their financial obligations due to scarce cash holdings and reduced liquidity, which, in turn, is forcing more firms to rely more heavily on the banks for their liquidity necessities (De Vito & Gomez, 2020). In addition, the banks’ vulnerability to the endogenous shock caused by COVID-19 has been exacerbated by their direct relations with a large number of stakeholders (e.g. governments, firms, individuals), when compared with other financial institutions (Chen et al., 2020). However, scholars argue that the banking sector plays a major role in absorbing shocks such as that caused by the COVID-19 pandemic and that its resilience is a key driver for the recovery of the global economy (Álvarez-Botas et al., 2021; Demirgüç-Kunt et al., 2020).

Firms’ performance in different sectors and their immunity during such a crisis is a current topic of debate among researchers (El-Chaarani et al., 2022a), with various scholars attempting to measure and investigate the implications of the ongoing pandemic on the financial performance of organizations (Weaver, 2020). For example, in their study on American restaurants, Song et al. (2020) found that the pandemic negatively affected the restaurants’ liquidity and increased their operational risk, while other studies have reported opposite findings, with the pandemic found to have positively affected firms’ financial performance in other sectors, such as the logistics sector in 14 of the G20 countries (Atayah et al., 2021).

The financial industry in general and the banks in particular are no exception to the effects of a crisis (Miah et al., 2021). Indeed, the banks experienced an immediate shock from the COVID-19 dissemination, affecting their operational efficiency in several countries. As noted, previous empirical studies have investigated the influence of the current crisis on banks’ financial performance and stability (Barua & Barua, 2021; Elnahass et al., 2021), with mixed results. At present, academic studies on this topic continue to emerge and there is, as yet, no real consensus among scholars on the impact of the pandemic on banks’ performance.

While most of the existing works focus on the impact of the crisis on the banks in developed countries, less attention has been paid to the banking systems of emerging countries (Boubaker et al., 2022). Nonetheless, many scholars have highlighted that the COVID-19 outbreak has had a greater negative impact on developing countries than on the developed nations (Jadah et al., 2020), which is due to several factors, including unstable policies, a weak or non-functional security market, an inadequate legal framework and corruption (Barua et al., 2017; Hevia & Neumeyer, 2020). In addition, the means of recovery from the pandemic is expected to be different across different countries and regions (World Bank, 2021). In developing and emerging countries, the banks are considered to be a key engine of growth (Xie et al., 2021), meaning their performance is at greater risk than those in developed countries. To the best of our knowledge, there is a lack of empirical studies examining the impact of the COVID-19 pandemic specifically in terms of the Middle East and North Africa (MENA) region, a gap that the current article aims to address in view of contributing to the existing bank-performance-related literature.

Therefore, the focus of this article is two-fold. First, it seeks to empirically investigate the influence of the pandemic on the banks’ financial performance in the MENA region, to assess their resilience in response to the pandemic, as well as any potential sign of recovery from the expected negative impact of the pandemic on their performance. Second, it aims to assess the moderating effect of the pandemic on the impact of different internal (credit risk, liquidity risk, capital structure, bank size, managerial efficiency) and external (oil, gross domestic product [GDP], inflation) factors on the performance of the banks in the MENA region.

The remainder of this article is structured as follows. The following section presents the literature review and outlines the theoretical framework of this research as well as the background for the construction of the research model and the formulation of the hypotheses. The next section then outlines the methodology and presents the details of the data and statistical analysis before the following section presents and discusses the study results. Finally, the last section ends this work with conclusions and recommendations.

Literature Review

Theoretical Background

This section presents the three theories that inform the current research: crisis management (resilience) theory (CMT), sense-making theory (SMT) and stakeholder theory (ST).

Crisis management is a process of management that is aimed at tackling the crisis before it happens, throughout its duration and during the aftermath. Companies may benefit from a better understanding of the factors that lead to financial difficulties in view of taking preventative actions to avoid bankruptcy (Onsay, 2021). Indeed, CMT suggests that, if adequately managed, a crisis can be a source of new opportunities resulting from the changing situations (Vargo & Seville, 2011). In fact, during the COVID-19 pandemic, the banks developed new techniques to deal with the changing business processes and explored various new opportunities, such as digitalization (Dadoukis et al., 2021; Nguyen et al., 2021). Several theories of crisis management are reported in the literature, while the one that is most relevant to this research is that developed by Garmezy (1991), namely, resilience theory. This theory emerged from the tenets of child psychology but came to be used in the realm of business, spawning the business continuity planning concept. Continuity planning for businesses is essentially the ongoing process of anticipating emergencies and developing action plans to survive the issue.

An extension of CMT is the SMT developed by Karl Weick (1995). This theory emphasizes the process that people use to better understand an unexpected or confusing event and to enable action (Weick et al., 2005). When individuals, organizations or communities encounter surprising or unusual events, they engage in ‘sense-making’ to answer the questions of ‘what is happening?’ and ‘what to do next?’ (Christianson & Barton, 2020). More specifically, SMT is characterized by three intertwined processes: noticing, meaning-making and acting. Here, ‘noticing’ relates to the identification of the unusual event and gaining a plausible understanding. In the case of COVID-19, organizations had to deal with a huge amount of information and thus struggled to fully understand the situation and its implications, thereby missing many cues during the crisis (Christianson, 2019). A further step is the ‘meaning-making’ process, the continuous process through which people and organizations transform their understandings of an unusual or critical event into plausible or new meanings. The sense-making process ends with people and organizations taking action based on the revised or final meanings derived from a problem or crisis.

Lastly, according to SMT (Freeman, 1984), the long-term survival of an organization depends on the satisfaction of all its stakeholders and not just the shareholders’ needs, which entails broadening the company’s responsibilities and stressing their relations with internal (e.g. employees) and external (e.g. clients, suppliers) actors who may have a stake in the organization. The SMT can also be situated within the realms of CMT (Zamoum & Gorpe, 2018). The pandemic-induced crisis continues to pose various risks to the long-term survival of banks, greatly and directly affecting many of the banks’ stakeholders. The decline in the banks’ financial performance could influence the shareholders’ satisfaction, as well as the lives of the employees, who continue to be at risk of redundancy, or those of the customers affected through increased requirements and limits on loans and other financing activities.

Hypotheses Development

The literature related to the implications of the COVID-19 pandemic for banks remains scarce and underdeveloped. However, previous crises, such as the GFC, could have some relevance in terms of inducing similar effects and adverse impacts on the banking system (Barua & Barua, 2021). Following the GFC, the Basel III Accord stipulated stricter capital and liquidity regulations, as well as the minimum equity capital thresholds (European Banking Authority [EBA], 2020). Thus, the banking systems entered the current pandemic with higher immunity and safety due to the lessons learned and the reduced risk-taking incentives. Nevertheless, there remains some heterogeneity in the banking capitalization rules across countries, which may explain why the COVID-19 pandemic is expected to have a different impact in developed countries than in the developing nations (Boubaker et al., 2022; World Bank, 2021). In short, countries with a robust pre-pandemic banking structure and higher liquidity buffers are more likely to be resilient to the pandemic and are expected to demonstrate a better financial performance (Danisman et al., 2021).

Moreover, several deficiencies, such as insufficient legal infrastructure, weak adoption of advanced technologies and corruption, still exist in the banking systems of developing countries. As a result, the COVID-19 pandemic presented the harshest test since the GFC for all the reforms in the financial and banking sectors and the stability of the banking system as a whole, especially in the developing countries. The following discussion uses the available literature related to the influence of the COVID-19 pandemic on the banking industry to develop relevant hypotheses.

Impact of the COVID-19 Pandemic on Banks’ Financial Performance

There is broad agreement among scholars that banks’ profitability is vital to the banking industry’s stability and competitiveness (Bekhet et al., 2021), while most agree that the COVID-19 pandemic was likely to negatively influence the banking sector performance in different ways from one country to another (Demir & Danisman, 2021). In fact, the reduced demands for borrowings, declined local and international trade, and limited foreign exchange transactions resulted in a sharp decline in banks’ revenues in terms of, for example, interests, fees and commissions (European Central Bank [ECB], 2020a), which, in turn, forced them to freeze a higher proportion of the net profit (Al-Hasan et al., 2020). As a consequence of the decrease in the dividend payout ratio, the banking system started losing its ability to attract new capital (Kozak, 2021), and their intermediatory role in the economy was at serious risk (Acharya & Steffen, 2020).

However, as noted, the academic literature investigating the influence of the pandemic on the banking sector is still in its infancy. A number of prior empirical studies revealed that the banking sector performance has declined due to the COVID-19 outbreak (Li et al., 2020; Singh & Bodla, 2020), with Girancourt et al. (2021) finding that African banks’ financial performance, measured according to return on equity (ROE), declined by half during 2020 and estimated that it will take 3 years to return to the pre-crisis performance levels. Other scholars linked the significant negative impact of the pandemic on banks’ profitability to the reduced household deposits (Janssens et al., 2021) and huge credit losses (Dwiarti et al., 2021), while Elnahass et al. (2021) also revealed that the pandemic adversely affected the banks’ financial stability and reduced their profitability.

Elsewhere, Miklaszewska et al. (2021) analysed the performance of the banks in the Central, Eastern and Northern European (CENE) countries, with the results indicating a decrease in the banks’ profitability in all the CENE countries except for Lithuania. Meanwhile, Balboula and Metawea (2021) investigated the performance of 12 banks listed on the Egyptian Stock Exchange during the pandemic and found that the pandemic harmed the banks’ performance, proxied with stocks’ return and subsequently the banks’ risk level, which was measured using the stock volatility factor. Overall, the pandemic has negatively affected the Egyptian banks’ stocks returns and is positively associated with increased volatility.

Hence, the first hypothesis was formulated as follows:

Hypothesis ₁ (H₁). The COVID-19 pandemic reduced the financial performance of the banks in the MENA region.

Impact of the COVID-19 Pandemic on the Risk and Capital Adequacy of the Banks

Banks are exposed to a wide range of risks that could seriously affect their stability during endogenous shocks such as that induced by the COVID-19 outbreak. Elnahass et al. (2021) investigated the financial performance of 1,090 banks from 119 countries from the beginning of 2009 until the middle of 2020 and unearthed a decrease in the banks’ lending activity during the pandemic and, subsequently, a significant increase in the operational and lending risks associated with lower levels of demand for loans.

A number of empirical studies revealed that the pandemic affected the banks’ credit risk (Baret et al., 2020), with Wu and Olson (2020), among others, reporting that the pandemic reduced the creditworthiness of loans granted to SMEs, leading to a significant tightening of the lending policy (European Central Bank, 2020b) or an increase in the long-term, short-term and systematic risk for banks.

Elsewhere, Miah et al. (2021) noted that the Islamic banks in Bangladesh hold the majority of the investments and credits in working capital and the merchant’s financing and thus argued that these Islamic banks were highly likely to be affected by the pandemic since these sectors were most vulnerable to the economic depression resulting from the outbreak.

Furthermore, scholars have highlighted that the lockdowns imposed by governments due to the rapid spread of the pandemic have profoundly changed clients’ preferences and economic behaviours, resulting in a decline in demand for financing individual projects and investments (Polski, 2020). Other studies have linked the increase in bank credit risk to the labour market changes during the pandemic.

Another risk potentially exacerbated by the pandemic, one that may affect the banks’ performance and survival, is the liquidity risk resulting from ‘the inability of a bank to handle any decrease in liabilities or to finance any increase in assets’ (Basel Committee on Banking Supervision, 1997). In facing these liquidity risks, banks could be forced to obtain spendable funds at an exceptionally high cost or to convert their assets that lead to relatively low returns, resulting in huge reductions in their earnings. Liquidity risk entails a profit-lowering cost that could be driven by a recessionary economic condition, increasing the borrower defaults and the demand for depositor’s withdrawals. Delechat et al. (2012) outlined that the demand for liquidity is countercyclical and that it increases during recessions, that is, banks store liquid assets in times of recessions and reduce them during periods of stability to produce more lending opportunities. In other words, a liquidity buffer is inversely related to real GDP growth and credit cycles.

In fact, higher liquidity levels create a liquidity buffer that provides insurance against liquidity shocks and bank runs and improves the soundness of the banking sector, especially during times of crisis such as the current turmoil induced by the COVID-19 outbreak. In short, the pandemic has resulted in a reduced inflow of income, thus forcing both individuals and organizations to withdraw and use their savings to survive (Baret et al., 2020). As such, banks may face liquidity shortages if the situation lasts for too long (Cheney et al., 2020). Furthermore, it is clear that liquidity and credit risk tend to shift simultaneously (Ghenimi et al., 2017).

Other scholars have investigated the impact of the pandemic on banks’ risk using the non-performing loan (NPL) ratio, which represents a measure of credit risk defined as the ratio of NPL, essentially the ratio of loans that include interest payments or principal past due by 90 days or more (International Monetary Fund [IMF], 2005) to total gross loans (Danisman et al., 2021). A number of studies found that a high NPL ratio is a common factor in many banking crises (Ari, 2021; OECD, 2021). Similarly, in a more recent study, Çolak and Öztekin (2021) found that the restrictive measures adopted to contain the COVID-19 pandemic led to numerous liquidity problems and insolvencies, thus increasing the banks’ NPL ratio.

Elsewhere, Barua and Barua (2021) found that the current pandemic-induced crisis adversely affected the banking sector’s performance in Bangladesh. More specifically, their study considered the NPL ratio as a controlling factor and examined the banks’ capital adequacy, interest income and risk-weighted asset value under different NPL shock scenarios, with the results indicating that the greater the NPL ratio, the greater the decrease in the above-mentioned ratios. When the NPL exceeded 10%, the banks failed to meet the minimum requirements of BASEL-III in terms of capital adequacy. Similarly, Danisman et al. (2021) found that countries with higher credit to deposit ratios, overhead costs, provisions and NPL ratios have been more vulnerable to the COVID-19 pandemic.

Several scholars have underlined how in order to mitigate the detrimental impact of the pandemic on banks’ financial strength and speed up the recovery process, all the banks throughout the world adopted various sensible regulatory measures, such as easing both the capital buffer and the treatment of the NPL ratio (Almutairi, 2022; Goodell, 2020), or by reducing the cost-of-credit pressures (Al-Ali, 2020; Al-Kandari et al., 2021). However, in their study on the impact of COVID-19 on the bank stock prices around the world, Demirgüç-Kunt et al. (2020) demonstrate that the financial sector policy announcements appeared to have had a limited impact, while they found exceptions in countries outside the Basel Committee, where such policy initiatives affected the bank returns. Therefore, the temporary easing of regulatory and surveillance requirements, including capital buffers, could impair the banks’ performance and trigger their solvency (Demir & Danisman, 2021).

Therefore, the following hypotheses were derived:

Hypothesis ₂ (H₂). The COVID-19 pandemic increased the credit risks for banks in the MENA Region.

Hypothesis ₃ (H₃). The COVID-19 pandemic reduced the capital adequacy of banks in the MENA Region.

With reference to the financial accounting empirical literature (Dao & Nguyen, 2020; Ercegovac et al., 2020; Hasan et al., 2020; Kumar et al., 2020; Nina & Socol, 2020), a model for the present study was developed, which included the banks’ performance determinants employed (Figure 1). Following Kosmidou et al. (2008), both internal bank-specific factors and external or macroeconomic factors that may contribute to banks’ profitability were included, albeit that they are beyond the bank managers’ control.

Methodology

This research empirically examines the financial performance and the resilience of the banking sector in the MENA region using a trend analysis approach based on comparisons of the bank average ratio of financial performance and stability over two time periods: pre-COVID-19 (2018–2019) and the main COVID-19 period (2020–2021). The resistance and performance of banking firms had to be observed using their financial data for 2020 and 2021 since the international health crisis appeared in the region from the first quarter of 2020. In this section, the methodology and the variables adopted from the sample and data sources are presented.

Descriptive statistics are generally used to reveal the context of the data obtained. This form of statistical analysis helped us to reveal the financial evolution and behaviour of the MENA banking sector following the advent of the pandemic.

The hypotheses were tested using a paired t-test, which is the most powerful test available when testing the hypothesis of the equality between two means and when the normality assumption for the differences is satisfied (Wilks, 1962). This test helped us to reveal whether the global development of COVID-19 had a significant impact, specifically in terms of the MENA region. The multiple regression model was employed to explore the predictors of MENA banks’ performance before and during the pandemic period. The objective of this statistical model was to reveal whether the determinants of bank performance remained the same before and during the main period of the COVID-19 pandemic.

Research Sample

The sample included observations on 148 banks working across nine MENA countries, considering the period of 2018–2019 as the ‘pre-COVID-19’ period and the period of 2020–2021 as the ‘during COVID-19’ period. The banks operating in MENA countries that are facing financial crises and challenges due to their unstable political and economic environments, such as Yemen, Djibouti, Iraq, Algeria, Palestine, Libya, Iran, Lebanon and Syria, were excluded from the sample selection to avoid any possible bias in the results of the empirical analysis. In short, political disturbances can greatly increase inflation and decrease investments, making them directly interconnected with the economy. Furthermore, to explore the evolution in the same sample from 2018 to 2021, it was decided to exclude banks with missing financial data for these 4 years. The data was collected from two main sources: The Orbis-Bank-Focus database and the banks’ annual financial reports. Table 1 shows the final sample distribution in the MENA region.

Table 1.

Sample Description.

Country	Bank n.	%
Kingdom of Saudi Arabia (KSA)	10	6.76
Tunisia	22	14.86
Oman	12	8.11
Kuwait	9	6.08
Bahrain	32	21.62
United Arab Emirates (UAE)	14	9.46
Morocco	16	10.81
Egypt	21	14.19
Qatar	12	8.11
Total	148	100

Source: The authors.

Measures and Regression Model

In this section, we present the variables employed in the regression equations. Here, we used a set of profitability ratios, liquidity ratios, capital ratios and risk measures affecting bank performance and financial stability, which have been widely applied in prior research (Barua & Barua, 2021; Elnahass et al., 2021; Trinh et al., 2020).

The banks’ financial performance is proxied by two accounting measures: return on assets (ROA) and ROE (Trinh et al., 2020; Usama & Umair, 2018). We also included the capital and liquidity measurements commonly used to assess the level of risk, namely, liquidity risk (LIQ), credit risk (CRR), managerial efficiency (MEF) and capital structure (CAS). In terms of the managerial efficiency measure, the cost to the net-income ratio (MEF) denotes the efficiency of the bank’s operations. Finally, we also included a bank-specific measure that might affect profitability, namely, the bank’s size (SIZ), proxied by the natural logarithm of total assets. Various macro-economic indicators were also considered, including inflation (IFL), GDP and oil price (OIP), since the COVID-19 outbreak led to a sharp drop in oil prices (Almutairi, 2022) and all nine countries in the sample are oil and/or natural gas producers. Table 2 summarizes the variables in terms of definitions and measurements.

Table 2.

Variables.

Variable		Description	Measurement
Dependent variables
Accounting performance proxies	ROE	Return on equity	(∑net income)/(∑equity)
Accounting performance proxies	ROA	Return on assets	(∑net income)/(∑assets)
Independent variables
Credit risk	CRR	NPL ratio	(∑NPL)/(∑loans)
Liquidity risk	LIQ	Liquidity ratio	(∑loans)/(∑deposits)
Capital structure	CAS	Capital adequacy ratio based on Basel rules	[(∑tier1 capital) + (∑tier2 capital)]/ (∑risk weighted assets)
Managerial efficiency	MEF	Cost to net income ratio	(∑cost)/(∑net income)
Control variables
Size	SIZ	Bank size	Natural logarithm of total assets
Gross domestic product	GDP	GDP per capita	∆ (GDP)
Inflation	IFL	Inflation rate	GDP deflator variation rate
Oil price	OIP	Annual variation of oil price	∆ (oil price)

Source: The authors.

Based on the variables selected for this study and described above, a multiple linear regression model was adopted. To investigate the impact of the COVID-19 pandemic on the performance of the MENA banks in 2018–2020, the following regression equations were developed:

\begin{matrix} R O A_{i t} = β_{0} + β_{1} L I Q + β_{2} C R R + β_{3} M E F + β_{4} C A S + \\ β_{5} S I Z + β_{6} I F L + β_{7} O I P + β_{8} G D P + ε_{i t} \end{matrix}

(1)

\begin{matrix} R O E_{i t} = β_{0} + β_{1} L I Q + β_{2} C R R + β_{3} M E F + β_{4} C A S + \\ β_{5} S I Z + β_{6} I F L + β_{7} O I P + β_{8} G D P + ε_{i t} \end{matrix}

(2)

In Equations (1) and (2), ROA_it and ROE_it are the accounting measures used to proxy bank performance, that is, the return on assets of MENA bank i at time t and the return on equity of MENA bank i at time t, respectively, while LIQ, CRR, MEF and CAS represent the independent or explanatory variables, and GDP, OIP and IFL are external measures used as control variables, with SIZ as the bank-specific or internal measure also used as a control variable.

Descriptive Analysis

In this section, we present the descriptive statistics of the variables, specifically the means of the banks’ profitability (measured by ROA and ROE), the risk levels (measured by LIQ and CRR) and the financial management levels (measured by MEF and CAS) in the MENA countries from 2018 to 2021.

As Table 3 shows, in the ‘during COVID-19’ period, the mean ROA fell in 2020, while it exhibited signs of recovery in 2021. Similar results were obtained for the dependent variable, ROE, which tumbled in 2020 but exhibited signs of a slight recovery in 2021.

Table 3.

Profitability, Financial Risk and Financial Management of MENA Banks.

Means for MENA Banks	Pre-COVID-19		During COVID-19
Means for MENA Banks	2018	2019	2020	2021
ROA	15,780	15,375	0,5352	0,7488
ROE	82,719	83,776	46,122	60,474
Liquidity risk (LIQ)	59,100	64,471	71,892	67,267
Credit risk (CRR)	931,412	943,556	939,990	836,746
Managerial efficiency (MEF)	416,088	410,362	404,464	440,095
Capital structure (CAS)	160,757	163,226	176,845	181,331

Source: The authors.

Table 3 also presents the descriptive statistics pertaining to the MENA banks’ risk level measured using the LIQ and CRR before and during COVID-19. The results indicated that MENA banks’ loan to deposit ratio (LIQ) increased with the advent of the COVID-19 pandemic, with an average of 71,892% in 2020 compared to an average of 64,471% in 2019. However, during the pandemic (2021) the LIQ ratio almost returned to the pre-pandemic levels. This result is consistent with the expectation that the expansion of the COVID-19 pandemic in 2020 led to a reduction in bank loans, thus increasing the level of the banking system’s LIQ. Nevertheless, the measures taken to mitigate the pandemic would appear to have first had an effect in 2021, with a higher mean LIQ ratio in the MENA region and thereby a reduction in the level of liquidity bank risk. In terms of the NPL ratio (CRR) the results indicated a continuous reduction in the CRR ratio between 2019 and 2021 in the MENA countries.

With regard to the financial management factor, the results indicated that the cost to net income ratio (MEF) decreased with the spread of the COVID-19 pandemic. This could be more related to the banks’ tentative attempts to mitigate their losses due to COVID-19-related restrictive measures by slashing costs in the short term rather than to a higher level of managerial efficiency. Indeed, the MEF ratio rose in 2021, which means that during the pandemic, the costs rose at a higher rate than income, suggesting that the banks must now act to enhance the managerial efficiency with a long-term view. In terms of the capital structure of banks in the MENA region, the results indicated that the CAS ratio increased with the advent of the pandemic. Furthermore, the increasing trend exhibited no signs of recovery during the pandemic, with an average CAS value of 181,331% in 2021.

Comparison of means (t-test)

The t-test was adopted to compare the mean value of the variables used in this research before and during the pandemic. Table 4 presents the comparison of the financial performance of the banks in the two periods. As the table shows, the pandemic significantly affected all the variables except for capital adequacy. The results of the t-test revealed that the financial performance of the banks measured by the ROA and ROE was significantly higher (p < 0.05) in the pre-COVID-19 period than in the main period of the pandemic. The ROA values before and during the pandemic were 1.5577 and 0.6420, respectively, with a statistically significant difference (p < 0.05). Similarly, the pre-COVID-19 ROE level of 8.3247 was significantly higher (p < 0.05) than that reported during the pandemic (5.3291). These results were consistent with those obtained by Girancourt et al. (2021), who used the ROE and ROA to confirm that the COVID-19 outbreak negatively affected the banks’ profitability. For certain, the banks should learn from the pandemic experience to improve their immunity during such times of crisis. Overall, the above findings support the first hypothesis (H1).

The results of the comparison between the credit risks of banks before and during the COVID-19 period are also presented in Table 4, with the t-test revealing a significant difference. The credit risk measured by CRR increased significantly (p < 0.05) during the pandemic from 6.17851 to 6.9579. The significant difference between the NPL/CRR ratios revealed that the banks were vulnerable during the high point of the pandemic. El-Chaarani et al. (2022b) obtained similar results in that the credit risks of two types of banks, Islamic and conventional, increased significantly due to the pandemic. The increased credit risk measured by the NPL ratio during the pandemic was mostly associated with the disrupted economic activities that led to liquidity problems in the hands of borrowers to honour their debt obligations (Barua & Barua, 2021; Fernández Cerezo et al., 2021). Thus, banks should revise their credit policies to improve the efficiency of their credit management. The above results are in line with those obtained in previous studies that indicated an association between increased credit risk and decreased financial performance. The increase in the NPL ratio is generally associated with reduced financial performance (Serwadda, 2018). Overall, the t-test results provide significant support for the second hypothesis (H2).

Table 4.

Comparison of Banks’ Financial Performance before and during the COVID-19 Pandemic.

Ratio	Period	Mean	N	Mean Difference	T	t-test Sig (two-tailed)
ROA	Pre-COVID-19	1.5577	296	0.9157	−4.408	0.000
ROA	During COVID-19	0.6420	296	0.9157	−4.182	0.000
ROE	Pre-COVID-19	8.3247	296	2.9956	−7.046	0.000
ROE	During COVID-19	5.3291	296	2.9956	−8.533	0.000
CRR	Pre-COVID-19	6.17851	296	−0.7793	−2.231	0.027
CRR	During COVID-19	6.9579	296	−0.7793	−2.143	0.033
LIQ	Pre-COVID-19	93.7483	296	5.0737	−9.221	0.000
LIQ	During COVID-19	88.6746	296	5.0737	−9.579	0.000
MEF	Pre-COVID-19	41.3225	296	−0.9055	−4.423	0.000
MEF	During COVID-19	42.2280	296	−0.9055	−4.401	0.000
CAS	Pre-COVID-19	16.1991	296	−1.7097	−0.261	0.794
CAS	During COVID-19	17.9088	296	−1.7097	−0.258	0.797

Source: The authors.

Table 4 also shows the comparison of the liquidity ratios during and before the COVID-19 period. The t-test revealed that the liquidity level was significantly affected (p < 0.05) by the COVID-19 pandemic. The LIQ ratio was 93.7483 before the pandemic but decreased to 88.6746 during the pandemic, indicating a significant difference (p < 0.05). These results were consistent with those obtained in previous studies, that is, the NPL ratio and the credit risk are inversely connected. An increase in the NPL ratio will induce a decrease in the LIQ (Ghenimi et al., 2017), meaning the increase in credit risk is associated with decreased bank liquidity.

The management efficiency, as measured by the MEF ratio, was also significantly different between the two periods. The higher the MEF, the less profitable the bank. The t-test results indicated a significant increase in the MEF value from 41.3225 before the pandemic to 42.2280 after its emergence (p < 0.05). Thus, the pandemic decreased the profitability of the banks, either through increased costs or decreased revenues, or both.

However, the t-test did not reveal any significant differences in the capital adequacy measured by the CAS ratio between the two periods (p > 0.05). These results were consistent with the findings obtained by El Chaarani et al. (2022a), who found that the pandemic did not affect the capital adequacy for either the Islamic or the conventional banks. Overall, our results failed to support the third hypothesis (H3).

Factors Affecting the Financial Performance of Banks before and during the COVID-19 Pandemic (Regression Analysis)

The objective of this part was to assess the influence of the internal and external factors on the financial performance of banks before and during the COVID-19 outbreak. Thus, multiple regression analysis was used to predict the value of the dependent variable, the financial performance measured by the ROA and ROE, based on the value of the independent variables. The independent variables were of two types: the internal variables (Liquidity risk-LIQ, Credit risk-CRR, Managerial efficiency-MEF, Bank size-SIZ and Capital structure-CAS) and the external variables (Inflation-IFL, Oil price-OIP and Gross domestic product-GDP). The regression results (Table 5) indicated that the model explained 49.91% and 47.82% of the variations in ROA and ROE, respectively, before the pandemic and 53.23% and 53.45% of the variations in ROA and ROE, respectively, during the pandemic. The results of the analysis of variance (ANOVA) test indicated that the independent variables significantly predicted the dependent variable (p < 0.05), confirming that the model was a good fit for the data.

Table 5.

Regression Analysis Results for the Two Periods.

Variables	Before the COVID-19 Pandemic		During the COVID-19 Pandemic
	ROA	ROE	ROA	ROE
	Coefficient	Coefficient	Coefficient	Coefficient
(Constant)	1.5828***	1.8525***	1.7715***	1.8801***
LIQ	0.0587	0.0842	0.0673	0.0730
CRR	−0.0834*	−0.0792**	−0.1572**	−0.1451**
MEF	0.2146*	0.2271**	0.3527***	0.3235***
SIZ	0.1272**	0.1157***	0.1372*	0.1414**
CAS	0.1948	0.2362	0.2541	0.2612
IFL	−0.0463	−0.03982	−0.0582	−0.0627
OIP	0.0572	0.0420	0.0562	0.0552
GDP	0.0672*	0.0789*	0.0633*	0.0862*
R ²	0.5837	0.6442	0.6256	0.5579
Adj. R²	0.4991	0.4782	0.5323	0.5345
F-stat	6.8427	6.9291	7.1386	6.7356

Source: The authors.

Note: *Significant at 10%; **significant at 5%; ***significant at 1%.

As Table 5 shows, the results were mixed across the variables. For example, the results indicated a positive relationship between LIQ and the financial performance of the banks as measured by the ROE and ROA before and during the pandemic. These results were in line with those obtained by Usama and Umair (2018), that is, the increase in the loan to deposits ratio will induce an increase in profitability. However, this relationship was not significant during both periods (p > 0.05). For illustration, it is clear that the positive impact of this ratio on the ROA increased during the pandemic, while its impact on the ROE decreased during the same period. On the contrary, a negative and significant association was found between the CRR and the financial performance, with the results indicating that the CRR had a negative and significant impact on both the ROE and ROA before and during the pandemic. As expected, the regression results indicated that this impact increased sharply during the pandemic, while the level of significance for the impact of the CRR on the ROA also increased during the same period. These results are supported by those obtained by previous scholars, including Duan et al. (2021) and Baret et al. (2020), who found that the pandemic increased the credit risk of banks due to various reasons, such as layoffs, lockdowns and a slow-moving economy.

Somewhat surprisingly, the cost to net income measure (MEF) had a significant positive impact on the ROE and ROA during the whole period. In fact, this ratio is generally expected to be negatively associated with bank profitability, as was confirmed by several previous researchers, such as El Chaarani et al. (2022). Meanwhile, the results also indicated that the impact of managerial efficiency on the ROE and ROA increased during the pandemic. This can be explained by a reduction in the banks’ running costs due to the use of technologies and the remote model of operations, with scholars arguing that the nature of the pandemic greatly accelerated the use of technology-based resources (Miklaszewska et al., 2021). In fact, the banks integrated digital technology in almost all of their activities—including mobile banking and fin-tech—to meet the customers’ demand and to enhance the bank’s performance (Chen & Zhang, 2021).

With regard to the size of the bank, as Table 4 shows, the bank’s size had a positive impact on both the ROA and the ROE before and during the pandemic. However, the positive impact increased during the pandemic in terms of both ratios. These findings were in line with those obtained by Demir and Danisman (2021), who studied the role of several bank-specific factors in the resilience of the banks during the COVID-19 pandemic and found that higher capitalization and deposits, fewer NPLs, greater diversification and a larger bank size were positively associated with higher resilience during the pandemic. However, Neves et al. (2020) obtained opposite results in that the bank size, as measured in terms of the number of employees, was negatively associated with the bank’s performance during the pandemic in the Eurozone countries. Here, the authors argued that higher the number of employees, the higher their payrolls and the lower the profitability. The results obtained by Neves et al. (2020) can be linked to our previous discussions on the relationship between the MEF and the banks’ financial performance, that is, the two factors are positively connected in cases where technologies that reduce the operating costs are used. Thus, the difference between our results and those obtained by Neves et al. (2020) can be explained by the low dependence on technologies during the pandemic by the banks that constituted their study sample.

Regarding the impact of the CAS on the ROE and ROA, the results revealed a positive but insignificant relationship before and during the pandemic. This result is somewhat consistent with our t-test results, which indicated that the CAS did not change significantly throughout the pandemic. However, previous scholars found that the CAS and ROE have a positive and strong relationship (El-Chaarani et al., 2022b), while others reported a significant negative impact of the CAS structure on the ROE (Pradhan & Parajuli, 2017).

Finally, the regression analysis revealed that out of the three external variables, only the GDP had a significant impact on the banks’ financial performance, with the results indicating a positive significant impact (at 10%) of the GDP on the ROE and ROA before and during the pandemic. It should be noted that the extent of the impact did not change greatly during the pandemic. Overall, the results suggested that the performance of banks is not manipulated by external factors such as inflation and oil prices. This could be due to the nature of the banking sector’s activity, which is not generally affected by inflation or oil prices. These results were in line with those obtained by Derbali (2021), who found that the different levels of economic growth and inflation have no significant impact on banks’ financial performance in Morocco.

Conclusions, Limitations and Future Research

Discussion of the Results

The aim of this article was two-fold: (a) to compare the financial performance of banks in the MENA countries, as well as their credit risk and capital adequacy before and during the COVID-19 pandemic; and (b) to investigate the key factors affecting the banks’ financial performance before and during the COVID-19 pandemic period. The descriptive statistics revealed that the financial performance of the banks in the MENA countries (as measured by the ROE and ROA) declined during the first year of the pandemic. However, during 2021, the results indicated that the financial performance of the banks in all the countries of the sample exhibited a slight recovery, except for Morocco, which exhibited a continued declining performance. Similarly, the credit risk and liquidity risk increased with the advent of the COVID-19 pandemic at the end of 2019/beginning of 2020 in all eight countries. The banks in Bahrain and Egypt were more resilient during the pandemic in terms of liquidity than those in the other countries. The results were in line with previous reports that illustrated that the effect of the pandemic was uneven across the various countries and regions (World Bank, 2021).

Meanwhile, the liquidity risk of the Bahraini and Egyptian banks decreased during the first year of the pandemic, while that of the other countries increased. However, except for Qatar, all of the countries reported a declining liquidity risk during the second year of the pandemic. In relation to this, the credit risk of the banks in the KSA, Morocco, Egypt and Qatar increased in 2020, while it decreased in the remaining countries. In terms of 2021, the credit risk of the KSA, Bahrain, Egypt and Qatar increased, while it decreased in the other countries. The analysis of the managerial efficiency ratio indicated that five out of the eight MENA countries experienced a decrease in the cost to income ratio in 2020. However, all the countries reported an increase in this ratio in 2021–2022. Finally, the descriptive statistics indicated that the capital adequacy ratio increased throughout the pandemic in all the countries.

The comparison of the financial performance, credit risk and capital adequacy during and before the pandemic, which was carried out using the t-test, provided several insights, including the fact that the financial performance of the banks, as measured by the ROE and ROA, was negatively and significantly impacted by the pandemic. These results were in line with those of other scholars who found that the pandemic negatively affected the performance of banks (Li et al., 2020; Singh & Bodla, 2020). In addition, Girancourt et al. (2021) revealed a major decline (by half) of the financial performance of African banks (as measured by the ROE) and suggested that these banks will require 3 years to return to their previous performance levels.

The t-test also revealed that the pandemic led to a significant increase in the credit risk of the banks, while it had no significant effect on their capital adequacy. These findings corroborate the empirical results obtained by Baret et al. (2020), who found that the pandemic increased the credit risk of the banks in their sample. In addition, the findings of Wu and Olson (2020) were also consistent in that they reported that the COVID-19 outbreak decreased the creditworthiness of the loans granted to SMEs and led to a significant tightening of the lending policy.

The regression analysis results indicated that the factors of managerial efficiency, bank size and GDP have had a significant positive impact on the banks’ financial performance. In contrast, the credit risk was found to have a negative and significant impact on the financial performance of the banks during and before the pandemic. Finally, no significant association was found between the banks’ financial performance and liquidity risk, capital adequacy, inflation and oil prices.

Practical and Theoretical Implications of this Research

The theoretical contribution of this article lies in enhancing the literature on the financial performance of banks in the MENA countries in several ways. First, the study results add to the previous research in that they confirm the negative effect of the crisis in general and the pandemic in particular on the profitability and risk of the banks. Second, this research provides both scholars and practitioners with a reasonable comprehension of the factors that may affect banks’ financial performance both during a pandemic and in normal situations. Third, this study demonstrated that the impact of the pandemic on the banking sector was uneven across the eight countries that constituted the sample. As the only country that reported a continued decrease in profitability in 2021, Morocco should learn from the experience of the other countries in surviving the pandemic. In addition, the measurements taken in terms of the Bahraini and Egyptian banks should be further investigated to unearth the reason(s) behind the decreased liquidity risk during the pandemic. Similarly, the banks in Qatar may benefit from the actions of those in the other countries to manage the liquidity risk in the post-pandemic period.

Governments and regulators should also intervene to mitigate the negative impact of the pandemic on the banking sector. Scholars such as Demirgüç-Kunt et al. (2020) found that certain policies aimed at regulating the financial sector, such as monetary easing, liquidity supports and borrower assistance programs, have moderated the negative influence of the current crisis on the financial sector, while Cakranegara (2020) found that the active involvement of governmental policies regarding credit terms and macroeconomic strategies is crucial to boosting banks’ resilience and maintaining economic stability. A further study on the banking sector in the CENE countries revealed a higher resilience among the banks during the pandemic, which was largely due to the direct and indirect aid from governmental authorities, such as liquidity support and capital relief mechanisms (Miklaszewska et al., 2021).

Limitations and Future Research

This article involved several limitations. First, the observations were limited to only eight countries out of the nineteen that form the MENA region. Second, the observations were limited to only 148 banks. Third, this research used the ROE and ROA as performance measures, while the use of Tobin’s Q may have provided more insights into the issue. Fourth, a single ratio was used to measure each of the factors of capital adequacy, liquidity risk and credit risk, and other ratios that may provide additional information are available. As such, this study could be extended to include other countries of the MENA region and a larger sample of banks, while a greater number of ratios could also be adopted. Furthermore, a robustness test could be employed to eliminate the unobserved impact of any constants and to test the consistency and endogeneity of the observed findings. Further investigations may also examine the role of specific factors in mitigating the impact of the pandemic on the banking sector, such as digitalization, government support and governance mechanisms, while they could also focus on investigating the banks’ survival strategies in the post-COVID-19 period.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

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