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Oil Prices and Bank Profitability

Evidence From Major Oil-Exporting Countries in the Middle East and North Africa

This paper analyzes the relationship between oil price shocks and bank profitability. Using data on 145 banks in 11 oil-exporting MENA countries for 1994-2008, we test hypotheses of direct and indirect effects of oil price shocks on bank profitability. Our results indicate that oil price shocks have indirect effect on bank profitability, channeled through country-specific macroeconomic and institutional variables, while the direct effect is insignificant. Investment banks appear to be the most affected ones compared to Islamic and commercial banks. Our findings highlight systemic implications of oil price shocks on bank performance and underscore their importance for macroprudential regulation purposes in MENA countries.

The empirical academic literature on differences in commercial and Islamic
banks is very scarce and mainly touches upon financial stability (Cihák and
Hesse, 2008) and does not examine their relationship with oil—the main revenue
source for government in these oil-exporting countries. Conceptually, since
Islamic banks often tend to fund themselves with sukuk besides Shariah
compliant deposits, and higher oil prices are associated with higher liquidity and
therefore deposits ...