Empirical evidence of the relationship between regulatory efficiency, market openness, and bank productivity in economies at different income levels: Evidence from selected Asian and MENA countries
DOI:
https://doi.org/10.24136/oc.2762Keywords:
bank productivity, economic freedom, regulatory efficiency, market openness, income levelsAbstract
Research background: Economic freedom plays a pivotal role in ensuring the progressive productivity of banks. It fosters a favorable economic climate and acts as a catalyst for the generation of innovative ideas. In addition, economic freedom allows new domestic and foreign entrants in the banking sector which leads to increased competition as well as wider range of product offerings and thus potentially affect bank efficiency.
Purpose of the article: This study aims to identify the effects of regulatory efficiency and market openness in terms of economic freedom on the bank’s productivity at three income levels: lower-middle, upper-middle, and high-income economies.
Methods: A sample of 15 countries are included in the study from differing income levels. The study uses the data envelopment analysis (DEA) based Malmquist productivity index (MPI) approach to measure banks’ productivity. This non-parametric approach measures the relative efficiency of banks by considering the production change while taking into account technical efficiency change and technological change in order to capture a comprehensive view over time. Then, regression analysis was performed utilizing the ordinary least squares (OLS) approach, fixed effect (FE), and random effect (RE) panel multiple regression estimation methods are utilized to measure economic freedoms and other determinants’ effect on banks’ productivity change over time.
Findings & value added: The results show that banks in high-income economies are more productive and have higher growth rates than those in upper- and lower-income economies. Furthermore, starting, obtaining permits, and closing businesses under business freedom have a detrimental effect on banks’ output, whereas the effects of labor freedom on employing, managing, and supervising staff members have a substantial favorable impact on banks’ productivity. Moreover, financial freedom and investment freedom under the market openness dimension negatively influence banks’ productivity. Government intervention is required to introduce regulations that allow foreign countries to provide labor at lower wages, introduce tax allowances, and control inflation rates. Thus, the empirical results of this study will benefit regulators and policymakers in developing a system and plan to increase banks’ productivity based on indicators of business, labor, financial, and investment freedom.
Downloads
References
Abbas, F., & Ali, S. (2022). Is economic freedom a moderator of the relationship between bank capital and profitability? Scientific Annals of Economics and Business, 69(2), 273–292.
DOI: https://doi.org/10.47743/saeb-2022-0016
View in Google Scholar
Abdelaziz, H., Rim, B., & Helmi, H. (2022). The interactional relationships between credit risk, liquidity risk and bank profitability in MENA region. Global Business Review, 23(3), 561–583.
DOI: https://doi.org/10.1177/0972150919879304
View in Google Scholar
Acharya, V. V., Borchert, L., Jager, M., & Steffen, S. (2021). Kicking the can down the road: government interventions in the European banking sector. Review of Financial Studies, 34(9), 4090–4131.
DOI: https://doi.org/10.1093/rfs/hhab002
View in Google Scholar
Addai, B., Tang, W., Gyimah, A. G., & Twumasi, M. A. (2022). Income diversification and bank performance nexus: Does corruption matter? Journal of Multinational Financial Management, 65, 100757.
DOI: https://doi.org/10.1016/j.mulfin.2022.100757
View in Google Scholar
Adelopo, I., Vichou, N., & Cheung, K. Y. (2022). Capital, liquidity, and profitability in European banks. Journal of Corporate Accounting & Finance, 33(1), 23–35.
DOI: https://doi.org/10.1002/jcaf.22522
View in Google Scholar
Adem, M. (2023). The impact of macroprudential policy and political institutions on bank credit risk in Ethiopia: A dynamic ordinary least squares analysis. Cogent Business & Management, 10(3), 2257829.
DOI: https://doi.org/10.1080/23311975.2023.2257829
View in Google Scholar
Akdeniz, Ö. O., Abdou, H. A., Hayek, A. I., Nwachukwu, J. C., Elamer, A. A., & Pyke, C. (2023). Technical efficiency in banks: A review of methods, recent innovations and future research agenda. Review of Managerial Science.
DOI: https://doi.org/10.1007/s11846-023-00707-z
View in Google Scholar
Albertazzi, U., & Gambacorta, L. (2010). Bank profitability and taxation. Journal of Banking & Finance, 34(11), 2801–2810.
DOI: https://doi.org/10.1016/j.jbankfin.2010.06.003
View in Google Scholar
Al-Gasaymeh, A. (2020). Economic freedom, country risk and cost efficiency in Jordan and the GCC Countries. Global Business Review, 21(1), 1–17.
DOI: https://doi.org/10.1177/0972150917749292
View in Google Scholar
Allen, F., Carletti, E., & Gu, X. (2019). The roles of banks in financial systems. In Oxford handbook of banking (pp. 40–61). Oxford University Press.
DOI: https://doi.org/10.1093/oxfordhb/9780198824633.013.2
View in Google Scholar
Altman, M. (2008). How much economic freedom is necessary for economic growth? Theory and evidence. Economics Bulletin, 15(2), 1–20.
View in Google Scholar
Aluko, O. A., & Ajayi, M. A. (2018). Determinants of banking sector development: Evidence from Sub-Saharan African countries. Borsa Istanbul Review, 18(2), 122–139.
DOI: https://doi.org/10.1016/j.bir.2017.11.002
View in Google Scholar
Asteriou, D., Pilbeam, K., & Tomuleasa, I. (2021). The impact of corruption, economic freedom, regulation and transparency on bank profitability and bank stability: Evidence from the Eurozone area. Journal of Economic Behavior & Organization, 184, 150–177.
DOI: https://doi.org/10.1016/j.jebo.2020.08.023
View in Google Scholar
Athari, S. A., & Bahreini, M. (2023). The impact of external governance and regulatory settings on the profitability of Islamic banks: Evidence from Arab markets. International Journal of Finance & Economics, 28(2), 2124–2147.
DOI: https://doi.org/10.1002/ijfe.2529
View in Google Scholar
Bergh, A., & Karlsson, M. (2010). Government size and growth: accounting for economic freedom and globalization. Public Choice, 142(1), 195–213.
DOI: https://doi.org/10.1007/s11127-009-9484-1
View in Google Scholar
Bitar, M., Saad, W., & Benlemlih, M. (2016). Bank risk and performance in the MENA region: The importance of capital requirements. Economic Systems, 40, 398–421.
DOI: https://doi.org/10.1016/j.ecosys.2015.12.001
View in Google Scholar
Blau, B. (2017). Economic freedom and crashes in financial markets. Journal of International Financial Markets, Institutions and Money, 47, 33–46.
DOI: https://doi.org/10.1016/j.intfin.2016.11.010
View in Google Scholar
Borsuk, M., Kowalewski, O., & Qi, J. (2023). The dark side of bank taxes. Journal of Banking & Finance, 157, 107041.
DOI: https://doi.org/10.1016/j.jbankfin.2023.107041
View in Google Scholar
Bos, J. W., & Kool, C. J. (2006). Bank efficiency: The role of bank strategy and local market conditions. Journal of Banking & Finance, 30(7), 1953–1974.
DOI: https://doi.org/10.1016/j.jbankfin.2005.07.008
View in Google Scholar
Boukhatem, J., & Moussa, F. B. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231–247.
DOI: https://doi.org/10.1016/j.bir.2017.11.004
View in Google Scholar
Chortareas, G. E., Girardone, C., & Ventouri, A. (2013). Financial freedom and bank efficiency: Evidence from the European Union. Journal of Banking and Finance, 37(4), 1223–1231.
DOI: https://doi.org/10.1016/j.jbankfin.2012.11.015
View in Google Scholar
Claessens, S., & Laeven, L. (2004). What drives bank competition? Some international evidence. Journal of Money Credit Bank, 36, 563–583.
DOI: https://doi.org/10.1353/mcb.2004.0044
View in Google Scholar
Cooper, W. W., Seiford, L. M., & Tone, K. (2002). Data Envelopment Analysis, a comprehensive text with models, applications, references, and DEA-solver software. Boston: Kluwer Academic Publishers.
View in Google Scholar
Defung, F., & Yudaruddin, R. (2022). Economic freedom on bank stability and risk-taking in emerging economy: Indonesian case study. Cogent Business & Management, 9(1), 2112816.
DOI: https://doi.org/10.1080/23311975.2022.2112816
View in Google Scholar
Demirgüç-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2021). Banking sector performance during the COVID-19 crisis. Journal of Banking & Finance, 133, 106305.
DOI: https://doi.org/10.1016/j.jbankfin.2021.106305
View in Google Scholar
Diamond, D. W. (2023). Nobel lecture: Financial intermediaries and financial crises. Journal of Political Economy, 131(10), 2597–2622.
DOI: https://doi.org/10.1086/725793
View in Google Scholar
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. Quarterly Review of Economics and Finance, 54(3), 337–354.
DOI: https://doi.org/10.1016/j.qref.2014.03.001
View in Google Scholar
Doan, A.-T., Lin, K.-L., & Doong, S.-C. (2018). What drives bank efficiency? The interaction of bank income diversification and ownership. International Review of Economics & Finance, 55, 203–219.
DOI: https://doi.org/10.1016/j.iref.2017.07.019
View in Google Scholar
Egan, M., Lewellen, S., & Sunderam, A. (2022). The cross-section of bank value. Review of Financial Studies, 35(5), 2101–2143.
DOI: https://doi.org/10.1093/rfs/hhab089
View in Google Scholar
Fӓre, R., Grosskopf, S., Norris, M., & Zhang, Z. (1994). Productivity growth, technical progress, and efficiency change in industrialized countries. American Economic Review, 84(1), 66–83.
View in Google Scholar
Ghosh, A. (2016). Banking sector globalization and bank performance: A comparative analysis of low income countries with emerging markets and advanced economies. Review of Development Finance, 6(1), 58–70.
DOI: https://doi.org/10.1016/j.rdf.2016.05.003
View in Google Scholar
Gorton, G., & Winton, A. (2003). Financial intermediation. In Handbook of the economics of finance (Vol. 1) (pp. 431–552). Elsevier.
DOI: https://doi.org/10.1016/S1574-0102(03)01012-4
View in Google Scholar
Gropper, D. M., Jahera, J. S., & Park, J. C. (2015). Political power, economic freedom and congress: Effects on bank performance. Journal of Banking and Finance, 60, 76–92.
DOI: https://doi.org/10.1016/j.jbankfin.2015.08.005
View in Google Scholar
Haque, F., & Brown, K. (2017). Bank ownership, regulation and efficiency: Perspectives from the Middle East and North Africa (MENA) region. International Review of Economics & Finance, 47, 273–293.
DOI: https://doi.org/10.1016/j.iref.2016.10.015
View in Google Scholar
Hasan, I., Wang, H., & Zhou, M. (2009). Do better institutions improve bank efficiency? Evidence from a transitional economy. Managerial Finance, 35(2), 107–127.
DOI: https://doi.org/10.1108/03074350910923473
View in Google Scholar
Hassan, M. (2020). How bank regulations impact efficiency and performance? Journal of Financial Economic Policy, 12(4), 545–575.
DOI: https://doi.org/10.1108/JFEP-06-2019-0119
View in Google Scholar
Heckelman, J. C., & Knack, S. (2009). Aid, economic freedom and growth. Contemporary Economic Policy, 27(1), 46–53.
DOI: https://doi.org/10.1111/j.1465-7287.2008.00123.x
View in Google Scholar
Heritage Foundation (2021). Index of economic freedom. The heritage foundation.
View in Google Scholar
Holmes, K. R., & Feulner, E. J., & O’Grady, M. A. (2008). 2008 Index of economic freedom. Heritage Foundation.
View in Google Scholar
Horváth, B. L. (2020). The interaction of bank regulation and taxation. Journal of Corporate Finance, 64, 101629.
DOI: https://doi.org/10.1016/j.jcorpfin.2020.101629
View in Google Scholar
Hu, S., & Zhang, Y. (2021). COVID-19 pandemic and firm performance: Cross-country evidence. International Review of Economics & Finance, 74, 365–372.
DOI: https://doi.org/10.1016/j.iref.2021.03.016
View in Google Scholar
Jubilee, R. V. W., Kamarudin, F. Latiff, A. R. A. Hussain, H. I. & Anwar, N. A. M. (2022). Does globalisation have an impact on dual banking system productivity in selected Southeast Asian banking industry? Asia-Pacific Journal of Business Administration, 14(4), 479–515.
DOI: https://doi.org/10.1108/APJBA-09-2020-0343
View in Google Scholar
Kallel, H., & Triki, M. (2024). Foreign ownership, bank efficiency and stability: Whether the institutional quality of countries is important? International Journal of Finance & Economics, 29(1), 632–653.
DOI: https://doi.org/10.1002/ijfe.2701
View in Google Scholar
Kamarudin, F., Anwar, N. A. M., Nassir, A. M., Sufian, F., Tan, K. M., & Hussain, H. I. (2022). Does country governance and bank productivity Nexus matters?, Journal of Islamic Marketing, 13(2), 329–380.
DOI: https://doi.org/10.1108/JIMA-05-2019-0109
View in Google Scholar
Le, T. N. L., Nasir, M. A., & Huynh, T. L. D. (2023). Capital requirements and banks performance under Basel-III: A comparative analysis of Australian and British banks. Quarterly Review of Economics and Finance, 87, 146–157.
DOI: https://doi.org/10.1016/j.qref.2020.06.001
View in Google Scholar
Liao, M.-Y. (2018). International evidence on economic freedom, governance, and firm performance. International corporate governance and regulation. Advances in Financial Economics, 20, 85–103.
DOI: https://doi.org/10.1108/S1569-373220180000020004
View in Google Scholar
Llorens, V., Martín-Oliver, A., & Salas-Fumas, V. (2020). Productivity, competition and bank restructuring process. SERIEs, 11(3), 313–340.
DOI: https://doi.org/10.1007/s13209-020-00214-4
View in Google Scholar
Masrizal, Sukmana, R., Fianto, B. A., & Gultom, R. Z. (2022). Does economic freedom fosters Islamic rural banks efficiency? Evidence from Indonesia. International Journal of Productivity and Performance Management, 72(9), 2538–2558.
DOI: https://doi.org/10.1108/IJPPM-11-2021-0660
View in Google Scholar
Mateev, M., & Bachvarov, P. (2021). Regulation, ownership and bank performance in the mena region: Evidence for Islamic and conventional banks. Emerging Markets Review, 47, 100789.
DOI: https://doi.org/10.1016/j.ememar.2020.100789
View in Google Scholar
Mirzaei, A., & Samet, A. (2022). Effectiveness of macroprudential policies: Do stringent bank regulation and supervision matter? International Review of Economics & Finance, 80, 342–360.
DOI: https://doi.org/10.1016/j.iref.2022.02.037
View in Google Scholar
Moudud-Ul-Huq, S. (2021). Does bank competition matter for performance and risk-taking? Empirical evidence from BRICS countries. International Journal of Emerging Markets, 16(3), 409–447.
DOI: https://doi.org/10.1108/IJOEM-03-2019-0197
View in Google Scholar
Najam, H., Abbas, J., Álvarez-Otero, S., Dogan, E., & Sial, M. S. (2022). Towards green recovery: Can banks achieve financial sustainability through income diversification in ASEAN countries? Economic Analysis and Policy, 76, 522–533.
DOI: https://doi.org/10.1016/j.eap.2022.09.004
View in Google Scholar
Nasreen, S., Mahalik, M. K., Shahbaz, M., & Abbas, Q. (2020). How do financial globalization, institutions and economic growth impact financial sector development in European countries? Research in International Business and Finance, 54, 101247.
DOI: https://doi.org/10.1016/j.ribaf.2020.101247
View in Google Scholar
Nayak, R. (2021). Banking regulations: do they matter for performance? Journal of Banking Regulation, 22(4), 261–274.
DOI: https://doi.org/10.1057/s41261-021-00145-5
View in Google Scholar
Qayyum, D. A., Kasheer, M., Haider, J., Mehmood, O., & Iqbal, A. (2018). Impact of ownership, competition, and management practices on efficiency of banking sector. Polish Journal of Management Studies, 18(1), 262–276.
DOI: https://doi.org/10.17512/pjms.2018.18.1.20
View in Google Scholar
Rahman, M. M., Rahman, M. M., Rahman, M., & Masud, M. A. K. (2021). The impact of trade openness on the cost of financial intermediation and bank performance: Evidence from BRICS countries. International Journal of Emerging Markets, 18(10), 3550–3587.
DOI: https://doi.org/10.1108/IJOEM-04-2021-0498
View in Google Scholar
Rakshit, B., & Bardhan, S. (2022). An empirical investigation of the effects of competition, efficiency and risk-taking on profitability: An application in Indian banking. Journal of Economics and Business, 118, 106022.
DOI: https://doi.org/10.1016/j.jeconbus.2021.106022
View in Google Scholar
Saidi, F., & Streitz, D. (2021). Bank concentration and product market competition. Review of Financial Studies, 34(10), 4999–5035.
DOI: https://doi.org/10.1093/rfs/hhab005
View in Google Scholar
Sarpong-Kumankoma, E., Abor, J., Aboagye, A. Q. Q., & Amidu, M. (2020). Financial freedom, market power and bank margins in sub-Saharan Africa. Journal of Financial Regulation and Compliance, 28(2), 283–299.
DOI: https://doi.org/10.1108/JFRC-05-2019-0066
View in Google Scholar
Siddique, A., Khan, M. A., & Khan, Z. (2021). The effect of credit risk management and bank-specific factors on the financial performance of the South Asian commercial banks. Asian Journal of Accounting Research, 7(2), 182–194.
DOI: https://doi.org/10.1108/AJAR-08-2020-0071
View in Google Scholar
Sufian, F., & Habibullah, M.S. (2010a). Has economic freedom fostered bank performance? Panel evidence from China. China Economic Journal, 3(3), 255–279.
DOI: https://doi.org/10.1080/17538963.2010.562039
View in Google Scholar
Sufian, F., & Habibullah, M.S. (2010b). Does economic freedom fosters banks’ performance? Panel evidence from Malaysia. Journal of Contemporary Accounting and Economics, 6(2), 77–91.
DOI: https://doi.org/10.1016/j.jcae.2010.09.003
View in Google Scholar
Ullah, S., Majeed, A., & Popp, J. (2023). Determinants of bank’s efficiency in an emerging economy: A data envelopment analysis approach. Plos One, 18(3), e0281663.
DOI: https://doi.org/10.1371/journal.pone.0281663
View in Google Scholar
Veeramoothoo, S., & Hammoudeh, S. (2022). Impact of Basel III liquidity regulations on U.S. Bank performance in different conditional profitability spectrums. North American Journal of Economics and Finance, 63, 101826.
DOI: https://doi.org/10.1016/j.najef.2022.101826
View in Google Scholar
Xiazi, X., & Shabir, M. (2022). Coronavirus pandemic impact on bank performance. Frontiers in Psychology, 13, 1014009.
DOI: https://doi.org/10.3389/fpsyg.2022.1014009
View in Google Scholar
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Oeconomia Copernicana
This work is licensed under a Creative Commons Attribution 4.0 International License.
