Macroeconomic Factors and the Performance of the Saudi Banking Sector: Does Oil Price Matter?

Abstract

This paper aims to identify the relationship between macroeconomic factors that could be potential sources of concern for the banking sector in Saudi Arabia. To achieve this, the ARDL cointegration approach was used in light of economic theory and the literature. Oil prices, interest rates, inflation, government spending, and GDP were identified as independent variables. The results showed a significant positive impact of oil prices and GDP on the performance of Saudi banks, while the performance of banks is negatively affected by interest rates and government spending. The study revealed that the most important determinants of bank performance are oil prices and interest rates. Therefore, this study suggests that banks should link and manage their loan portfolio in proportion to oil price shocks.