DEGREE OF GOVERNMENT AI READINESS OF MENA COUNTRIES AND ITS IMPACT ON BANKING PERFORMANCE

Abstract

The Middle East and North Africa (MENA) open banking sector is undergoing a profound transformation driven by technological advancements, particularly artificial intelligence (AI). It is projected to grow at a compound annual growth rate (CAGR) of 25% through 2027, reaching US$1.17 billion in the MENA region. By 2030, AI is expected to contribute US$38 billion to the financial, professional, and administrative services sector and account for 13.6% of the GCC's GDP. AI adoption in MENA banking is characterized by applications in customer service enhancement, fraud detection, anti-money laundering, risk assessment, operational automation, and personalized financial services. Despite an innovation-focused regulatory environment and thriving FinTech ecosystems, banks face challenges such as data quality issues, fragmented legacy systems, integration difficulties, and a shortage of skilled professionals. This study examines the relationship between AI maturity and banking sector performance in MENA countries. Employing a quantitative research design with panel data analysis, the study uses a random effects model to control for country-specific effects. The sample data includes 167 banks, comprising 51 Islamic banks and 116 conventional banks, originating from 14 dual-banking countries, over the period from 2020 to 2023. The results reveal a negative relationship between AI readiness and bank profitability (return on assets, ROA), likely attributed to increased competition from non-banking financial institutions (NBFIs) and the high cost of implementing AI technologies. Also, the findings suggest that AI readiness moderates the economic growth-profitability relationship by reducing this negative impact. Notably, the study finds no significant difference in the behavior of Islamic and conventional banks regarding AI adoption. The study contributes to understanding how varying levels of AI maturity across MENA countries correlate with banking performance metrics. It provides valuable insights for financial institutions seeking to optimize AI strategies in the region's unique technological and regulatory landscape. Keywords: artificial intelligence, banking performance, MENA, digital transformation, financial technology, FinTech

Date of Award	2025
Original language	American English
Awarding Institution	HBKU College of Islamic Studies