Banking Efficiency Determinants in Saudi Arabia: Panel Data Analysis

This study analyzes the effects of competition on Saudi banks’ efficiency, measured by the bank productivity ratio. We employed a panel data sample of nine (9) Saudi banks registered on the Saudi Stock Exchange over twelve years, 2008–2019. The bank size, capitalization, ownership structure, concentration index IHH, and concentration ratio were used to gauge competition. Two control variables (Economic Growth and Inflation) also comprised the data used in this study. In addition, we collected annual data from the annual reports of the Saudi banks. Using a linear dynamic panel data model, we explore banking governance mechanisms’ role in operational efficiency. Econometric results showed that capitalization, Ownership, banking concentration ratio, HHI index, economic growth, and inflation played an essential role in banking efficiency, as they have negative and significant coefficients at a 5% level. But there was no discernible correlation for Saudi bank size. Findings also showed a lower value of competition concentration for Saudi banks (13.5%), suggesting that Saudi banks operate in a market to perfect rather than imperfect competition conducted by the dilution of the ownership of banks, homogeneity of products, fluidity of capital and informational transparency. Last but not least, this study is unique because it examines the specific features of the Saudi banking system, particularly the factors that affect banking efficiency. In addition, using the HHI Index and concentration level in the Saudi market context is also a methodological contribution.