The Impact of Public Debt on Banking Sector Profitability:

Empirical Evidence from MENA Countries

Abstract

This study aimed to highlight the impact of public debt on the profitability of the banking sector for a sample of 16 countries from the Middle East and North Africa region, and based on annual and balanced data (panel data) for the period (2000-2020), and by applying the standard feasible generalized least squares (FGLS) model, the results showed in general that all independent variables used in the current study can be considered reliable influencing factors and are important indicators for predicting bank profitability. Specifically, the results of the study showed a statistically significant positive effect between the bank credit to government and the profitability of commercial banks (ROAA, ROAE), while the results indicated a statistically significant negative effect relationship between the total public debt index as a percentage of real GDP and bank profitability (ROAA, ROAE). Therefore, the study recommended that commercial banks should pay more attention to diversifying their investments, such as working to apply various Islamic investment formulas, such as participation and speculation in development projects, as they are the ideal alternative to traditional investments. Additionally, governments should rationalize public expenditures and work to increase government revenues from their various sources.