Financial Sector Development and the Determinants of Bank Profitability : A GCC Panel Study

This study looks at the determinants of profitability in the GCC banking system over the period 1999 to 2012. Variables which are bank specific, financial sector specific and macroeconomic are used as explanatory variables in the balanced panel regressions. Among the bank-specific variables, capital ratio and credit risk have significant impact on bank profitability. While higher levels of capital result in higher profitability, credit risk has the opposite impact. Inflation is found to effect bank profitability positively. Two financial sector development variables are used as explanatory variables in the panel regressions. While spread of banking activity has no impact on bank profitability, stock market capitalization as ratio of GDP has a strong positive impact on bank profitability. Bank finance acts a complement to equity financing in GCC banks. Evidence of a strong linkage between stock market capitalization and bank profits during the two financial crisis periods is also presented