Bidirectional Relationship Between Cash Holdings and Financial Performance for Banks in the MENA Region

Abstract

This study examines the interrelationship between cash holdings and financial performance by firstly investigating whether the existence of an optimal cash level maximizes financial performance and secondly measuring the impacts of financial performance over the optimal level of cash holdings. This study uses a sample of 400 financial institutions in the Middle East and North Africa (MENA) region across 18 different countries over 15 years (2003–2017). The results support the hypothesis about the positive impact of cash holdings over the financial performance as well a positive influence for financial performance over the existence of an optimum level of cash holding. The analysis supports this association through a robustness test by controlling the culture variables based on Hofstede's model as well as through using different alternative measures for cash holdings. This study is one of the original empirical studies that measure the interrelationship between holding cash and the level of financial performance through the banking sector in the MENA context.