Enterprise AI Analysis
Does every cloud have a silver lining? The effect of digitalization and government measures on bank efficiency during the pandemic
During the COVID-19 crisis, MENA banks have supported the economy by addressing liquidity needs and maintaining activity through digitalization, whereas governments and central banks have implemented supportive measures. This study highlights the unique challenges and opportunities for banking efficiency in the MENA region. Specifically, it aims to investigate the impact of the COVID-19 crisis on the technical efficiency of banks in the MENA region, taking into account the role of digitalization and government measures. Using data envelopment analysis (DEA) and Tobit regression, 134 banks in 11 MENA countries from 2017-2021 were analyzed.
Executive Impact & Key Findings
The findings show that the COVID-19 pandemic had a negative effect on the technical efficiency of banks in the MENA region, leading to both pure technical inefficiency (suboptimal input utilization) and scale inefficiency (misaligned returns to scale). Moreover, digital tools mitigate the pandemic's negative effects by improving pure technical efficiency. In contrast, economic government measures amplify the negative impact of COVID-19 by reducing scale efficiency. These results highlight the role of digital technologies as crisis safeguards and the nuanced effects of government intervention. These findings have significant implications for banks, policymakers, and regulators in the MENA region. Banks highlight the necessity of investing in digital technologies and capabilities to increase their technical efficiency. Policymakers and regulators should also prioritize initiatives that promote digital adoption in the banking sector while providing a conducive regulatory environment. Additionally, government interventions should carefully implement economic measures during crises to avoid negative consequences for banks' scale efficiency. This study fills a crucial gap in the literature by examining the unique impact of the COVID-19 pandemic on bank efficiency in the MENA region, whereas previous studies focused on performance. Its novelty lies in its comprehensive analysis of both the detrimental effects of the pandemic and the roles of digitalization and government measures, shedding light on the complex dynamics among crises, technological disruptions, and policy responses that shape banking sector resilience.
-7.02%
Pandemic Impact on Overall Efficiency (GTE)
6.99%
Digitalization's Pure Technical Efficiency (PTE) Boost
-37.71%
Government Policy Impact on Scale Efficiency (SE)
134
Banks Analyzed
11
MENA Countries Studied
5
Years of Data (2017-2021)
Deep Analysis & Enterprise Applications
Select a topic to dive deeper, then explore the specific findings from the research, rebuilt as interactive, enterprise-focused modules.
The COVID-19 Pandemic's Impact on Bank Technical Efficiency
The COVID-19 pandemic had a detrimental impact on the technical efficiency of MENA banks, leading to both pure technical inefficiency (suboptimal input utilization) and scale inefficiency (misaligned returns to scale). Bank outputs declined due to reduced production and investment by companies, and increased default risk for borrowers. This contraction in lending activities and increased variability in other earning assets, alongside decreased salary expenses and moderately reduced deposits, compromised both input utilization efficiency (PTE) and operational scale appropriateness (SE).
Government Economic Measures and Their Nuanced Effects
Economic government measures, intended to support the economy, exacerbated the adverse effects of the crisis on banks by reducing their scale efficiency. While essential for addressing immediate financial pressures, measures such as liquidity injections, loan guarantees, and regulatory adjustments (e.g., loan repayment deferrals, dividend distribution suspensions) led to inefficiencies in scale management. These interventions created additional operational, financial, and regulatory challenges, diverting resources and potentially distorting efficiency indicators.
Digitalization as a Crisis Safeguard and Efficiency Driver
Digital tools mitigated the negative effects of the pandemic by enhancing pure technical efficiency. Banks with robust digital infrastructure showed improved operational efficiency, including a 15% reduction in operational costs through automation. Cloud-based technologies and virtual collaboration tools helped maintain productivity levels for remote work. User-friendly mobile apps increased digital channel adoption, improving customer satisfaction. Advanced analytics for credit risk assessment resulted in lower increases in nonperforming loans, highlighting digital technologies as critical crisis safeguards.
Efficiency Differences: Islamic vs. Conventional Banks
Islamic banks were, on average, less technically efficient than conventional banks during the pandemic, with a more pronounced impact on scale efficiency. This vulnerability is attributed to their debt-based activities closely tied to real economy sectors, making them more susceptible to liquidity losses from delayed funding repayments and global postponements of installment payments. Notably, digitalization had a negative effect on Islamic bank efficiency during the pandemic, likely due to insufficient infrastructure and reliance on basic online services, contrasting with conventional banks that benefited from digital transformation.
-7.02%
Average decline in overall bank technical efficiency (GTE) during the pandemic.
Enterprise Process Flow
Data Envelopment Analysis (DEA)
→
Tobit Regression
→
Hypotheses Testing
→
Policy Implications
| Feature / Impact | Islamic Banks | Conventional Banks |
|---|---|---|
| Overall Efficiency (GTE) During Pandemic | Less efficient overall | Negative impact, but less pronounced than Islamic |
| Scale Efficiency (SE) During Pandemic | More pronounced inefficiency due to debt-based activities and real economy ties | Impacted, but with potential for better scale adaptation |
| Digitalization Impact on Efficiency | Negative effect (insufficient infrastructure, reliance on basic online services) | Mitigated negative effects by improving pure technical efficiency |
| Government Measures Impact on Efficiency | Comparable negative influence on scale efficiency | Comparable negative influence on scale efficiency |
Digital Transformation: A Crisis Safeguard
Banks in the MENA region with robust digital infrastructure exhibited improved operational efficiency during COVID-19. Advanced automation systems for account management and transaction processing led to a 15% reduction in operational costs. Digitally prepared banks maintained productivity levels close to pre-pandemic standards through cloud-based technologies and virtual collaboration tools. User-friendly mobile apps saw a notable rise in adoption, improving customer satisfaction. Banks utilizing predictive analytics for credit risk assessment reported a lower increase in nonperforming loans, proving digital tools as critical for resilience.
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