The role of government in shaping market competition and ownership structure in the banking industry: substitutes or complements?

This study investigates how market competition and ownership concentration influence bank performance in the Middle East and North Africa (MENA) region, with a particular focus on the role of government in shaping these relationships. Using data from 175 banks across 19 countries from the MENA region between 2006 and 2022, we explore whether competition and ownership act as substitutes or complements under regulatory and institutional frameworks. Unlike prior studies, this research focuses specifically on the banking sector, where governance structures are strongly shaped by policy and regulation. The findings indicate that, individually, both ownership concentration and market power enhance profitability and stability. More importantly, their interaction demonstrates a complementary effect: market competition amplifies the positive impact of ownership concentration on bank performance. This effect remains robust across varying levels of ownership concentration. The results indicate that government policies promoting fair competition can enhance and reinforce the benefits associated with ownership structures. Furthermore, Islamic banks appear to benefit more from the complementarity effect of governance mechanisms compared to conventional banks, highlighting the importance of tailored regulatory oversight to promote financial stability within a dual banking system.