Country risk and bank returns: Evidence from MENA countries

In this study, country risk factors are examined in relation to bank stock returns in the MENA region. Additionally, it analyzes whether the impact of risk factors on returns differs between Islamic and conventional banks. According to the 2S-GMM method and 166 MENA banks from 2010 to 2020, returns in MENA countries are positively correlated with low risk. The interaction effect between risk factors and Islamic banks suggests that the lower the risk, the lower the returns for Islamic banks in MENA. This means Islamic banks in MENA face higher risks of generating higher returns. The sensitivity of Islamic banks comes from the extra supervision and regulation they face compared to their counterparts. Despite their superior returns, Islamic banks still need to be protected from other factors.