Capital Structure Determinants of MENA Banks

Abstract

This study tests theoretical predictions about capital structure determinants in the rarely explored context of Middle Eastern and North African (MENA) banks. Differences in capital structure decisions between Islamic and conventional banks are also examined. We use a panel 116 banks over the post-crisis period, 2011-2015. The baseline results show that total and short-term debt ratios are positively affected by the bank’s size and growth rate but negatively affected by its profitability and liquidity. Conversely, the long-term debt ratio is negatively affected by the bank’s size and growth rate. However, the dynamic Arellano-Bond estimations suggest that current year debt ratios are mainly explained by their prior year (target) levels, and many traditional capital structure determinants, except growth rate and profitability, are weak. Moreover, Islamic banks seem to maintain similar capital structure as conventional banks but have their financing decisions affected by different determinants.

Keywords: Capital Structure, Islamic Banks, Conventional Banks, Leverage, Short-Term Debt, Long-Term Debt, Panel Data, Arellano-Bond System GMM, MENA

JEL Classification: G21, G32