An extensive literature has shown that higher levels of bank competition are associated with lower prices for banking products, increased access to finance, and greater bank efficiency. The more competitive Middle East and North Africa's banking sector, the more stable and the less likely the landscape will be dominated by “too big to fail” financial institutions.
This paper studies the extent of bank competition in the Middle East and Northern Africa region during 1994-2008, using non-structural measures of competition such as the H-statistic and the Lerner index. Both these measures suggest that banking sector competition in the region is lower relative to other regions and has not improved in recent years. An analysis of the determinants of competition across countries suggests that lower levels of competition in the Middle East and Northern Africa are explained by the region’s worse credit information environment and lower market contestability.
Measures to promote competition in MENA should focus on making banking sectors in the region more contestable and on improving the scope, access, and quality of credit information among banks. Countries where stock markets and other non-bank financial intermediaries play a significant role tend to have more competitive banking sectors, suggesting that policies that promote these other sectors also need to be in MENA’s policy-makers’ agendas. The key will be to balance bank competitiveness with financial stability.