FACTORS AFFECTING THE PROFITABILITY OF GCC BANKS IN THE COVID-19 PANDEMIC

Abstract

This study examines the factors influencing the profitability of Islamic and traditional banks operating in the Gulf Cooperation Council (GCC) countries, with a particular emphasis on the impact of the COVID-19 pandemic. The objective of this study is to examine internal and external factors of banks and the impact of the COVID-19 pandemic that significantly influence profitability. The internal factors used in this study are the CAMEL variables (Capital Adequacy, Asset Quality, Management Efficiency, Earnings Ability, and Liquidity), while the external factors include macroeconomic variables such as GDP, inflation rate, and interest rate. The panel data of 59 banks, collected from the annual reports available on the official websites of the banks and the stock exchanges operating in six GCC countries, is used for the period from 2015 to 2023. Employing a quantitative approach and panel data regression analysis, the impact of internal and external explanatory variables is evaluated using fixed-effects and random-effects models. The measures of profitability used as dependent variables are return on assets (ROA) and return on equity (ROE). Fixed effects results are used for interpretation based on the Hausman test. The results show that inflation has a positive and significant impact, while GDP and interest rate have a negative and insignificant effect. Capital adequacy, Asset quality, and liquidity exhibit a positive and significant effect on profitability. Furthermore, the COVID-19 pandemic is found to have a negative and statistically insignificant impact on profitability. During the pandemic, the importance of internal financial indicators, particularly capital strength and liquidity, became more pronounced, while the influence of external macroeconomic variables diminished. The findings underscore the need for regulators across the GCC to harmonize banking regulations, ensuring consistent standards for capital, liquidity, and risk management requirements, thereby strengthening regional financial stability.