The Scale Dilemma: Investigating the Non-Monotonic Relationship Between Bank Size and Market Value in Emerging Middle East and North Africa (MENA) Economies

This study investigates the non-monotonic relationship between bank size and market value in the emerging economies of the Middle East and North Africa (MENA) region, with a focus on comparing Islamic and conventional banks. The analysis uses fixed-effects panel techniques, supported by random-effects, pooled OLS, and Hausman–Taylor methods for robustness, based on a sample of 161 publicly listed banks across 17 MENA countries from 2009 to 2022. The findings show that bank size positively influences market value initially, indicating economies of scale, but larger sizes lead to diminishing returns, reflecting a non-monotonic relationship. This pattern is more evident for conventional banks, while the results for Islamic banks are less conclusive, suggesting the need for further investigation. Islamic banks seem to benefit less from economies of scale, possibly due to unique operational and governance challenges. This study fills a gap in the literature on the size-market value relationship in emerging markets, offering insights into how local conditions and regulations shape bank performance. It also provides a novel comparison between Islamic and conventional banks, enhancing understanding of sector-specific dynamics. By challenging the linear assumptions of prior research, the study highlights the complex non-linear effects of bank size, emphasizing the role of agency conflicts and regulatory oversight in managing systemic risks. The research contributes to both empirical and theoretical discussions on banking scale management and agency theory in emerging market contexts.