Net interest margin in dual banking systems of the MENA region: Balancing profitability and social responsibility

Net interest margin (NIM) represents the tradeoff between banking profitability and the social cost of intermediation. Through the lens of the dealership model and decoupling hypothesis, this study investigates determinants of NIM among 275 banks from 20 Middle Eastern and North African (MENA) countries for 2006–2021 using OLS, System‐GMM, and subsamples. The results reveal that Islamic banks consistently report lower NIMs than their conventional peers, reflecting their pro‐social, Shari'ah compliant mandate, and institutional pressure to balance profit margin with financial ethics and inclusion. NIM is positively associated with capital strength and loan specialization, but negatively associated with credit risk, regulatory quality, and economic shocks such as Covid‐19. Larger banks, especially in upper‐income countries, tend to maintain lower margins. In line with the notions of decoupling hypothesis, Islamic banks exhibit distinct dynamics: They benefit more from liquidity buffers and size advantage, but suffer greater margin compression under rising credit risk, particularly in lower‐income economies, when compared against the conventional banks. This calls for tailored regulatory strategies to preserve competition and financial stability in dual banking systems, recommending expanded Shari'ah‐compliant liquidity tools and FinTech adoption to enhance efficiency and margin resilience in Islamic banks.