Property Rights and Bank Performance in the MENA Region

Banks must be financially secure to effectively carry out their function as financial service providers smoothly. Their profitability heavily impacts the financial security of banks. This study investigates the impact of legal regulations, specifically property rights and the strength of the legal system, on bank performance in five Middle Eastern economies (Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE) from 2014 to 2023. Using static panel data analysis with return on assets (ROA) and return on equity (ROE) as performance measures, the research finds a positive relationship between stronger legal regulations and improved bank profitability. Control variables include bank-specific factors like size, liquidity, credit risk, and macroeconomic indicators. The results underscore the critical role of robust legal institutions in fostering financial stability and efficiency, providing valuable insights for policymakers aiming to enhance the banking sector in emerging markets. Multicollinearity is not a significant concern because the correlation coefficients between the explanatory variables are often less than 0.50. A weak correlation between ROE and ROA (r=27) suggests that banks in the sample likely have varying debt levels, as some may rely heavily on borrowed funds, others on equity. The Hausman test indicates that the coefficient difference is not systematic since p = 0.151 > 0.05, so the random effects model is applicable. Broadly, our study can contribute to policy decisions and discussions around reforms in the legal system, promoting transparency and accountability as well as the efficiency of the courts. The limitations of this study include how the panel data analysis takes place over a period of 9 years, which can be elaborated to include a broader timeframe.