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This study investigates the simultaneous impact of the major sources of bank default, namely credit risk and liquidity risk on price-cost margins during economic fluctuations in the MENA countries with a dual banking system. We use an annually balanced data set including 30 conventional banks and 14 Islamic banks from 9 countries covering the period 2004–2020. Our findings highlight the importance of the two risk factors on determining banks’ cost of intermediation. The most interesting result is that their effects on bank margins are sensitive to economic fluctuations. More specifically, both risk factors have more significant effect on price-cost margins during good economic times. One important implication of our findings is that the authorities and policymakers should pay more attention to liquidity and risks during booms.

The impact of credit risk and liquidity risk on bank margins during economic fluctuations: evidence from MENA countries with a dual banking system