THE DETERMINANTS OF THE TUNISIAN BANKING INDUSTRY PROFITABILITY: PANEL EVIDENCE

Restructuring of the commercial banking system in Tunisia begun in 1987, and was intended to instil competition in he banking sector, mobilize savings and lead to a more efficient allocation of resources. Reforms were articulated around five axes: liberalization of interest rates and credit allocation, introduction of new indirect monetary policy,

strengthening prudential regulation, opening the financial sector to foreign financial institutions and promotion of the equity market. All these developments would certainly have implications on the interest margin and profitability of the Tunisian banking industry. This research paper was initiated by a series of question: Why are some commercial banks more successful than others? To what extent are discrepancies in bank's profitability due to variation in endogenous factors under the control of bank management and to what extent, do external factors impact the financial performance of these banks? Answers to the questions would be helpful to identify the determinants of successful Tunisian commercial banks in order to formulate policies for improved profitability of these institutions. This paper follows in the footsteps of Abreu and Mendes (2002), Demerguç-Kunt and Huizingha (1999) and Ben Naceur and Goaied (2001) among others. It extends the existing literature several ways. First, using bank level data for Tunisia in the 1980-2000 period (Ben Naceur and Goaied, 2001 use only the 1980-1995 period), we provide statistics on size and decomposition of bank's interest margin and profitability. Second, the paper uses regression analysis (panel data with random effects) to find the underlying determinants of Tunisian banking industry performance. To this end, a comprehensive set of internal characteristics is included as determinants of bank's net interest margin and profitability. These internal factors include equity, overhead, and interest bearing assets. Third, while studying the impact of bank's characteristics on their performance, we include macroeconomic (inflation and growth) and financial structure indicators (bank and market size, and concentration) to control for the effect of external factors (not included in Ben Naceur and Goaied, 2001). The remainder of the paper is organized as follows. A brief review of relevant literature is presented in section II. The empirical models we employ are described in section III, along with a description of the data used in the study,download.