Financial Inclusion and Bank Stability in the MENA Region: What Role Does Institutional Quality Play?

Abstract

This paper has three main objectives. First, it explores how financial inclusion (FI) affects the stability of banks. Second, it examines the influence of institutional quality (IQ) on bank stability. Third, it analyzes whether IQ mediates the relationship between financial inclusion and bank stability. The Middle East and North Africa (MENA) region’s 68 conventional banks are the sample used in the study, which spans the years 2005–2020. For a more in-depth analysis, the MENA region is divided into two sub-regions: 33 banks in Gulf Cooperation Council (GCC) countries and 35 banks in non-GCC countries. The empirical approach utilized is the System Generalized Method of Moments (SGMM). The results show that bank stability is negatively impacted by financial inclusion, while institutional quality enhances bank stability in MENA banks. Additionally, the results show that MENA banks benefit from the connection between financial inclusion and institutional quality, a conclusion consistent across the full sample, the two sub-regions, and three different measures of bank stability.