Global Uncertainty: The Influence of Monetary Policies Order and Inflation Volatility on Bank Profitability African Bank and Middle East Bank

: The objective of this paper is to examine the factors that influence the resilience and adaptability of banks to economic disruption. The aim is to encourage a collaborative and cooperative approach to these challenges. This study analyses the impact of monetary policies, inflation trends, and bank-specific determinants on bank profitability in the African and Middle Eastern regions. A quantitative research approach was used to assess macro and micro factors affecting bank profitability, using secondary data. The macro variables were obtained from the International Monetary Fund (IMF), and the micro variables were extracted from the banks' annual accounts. The research findings indicate that monetary policy and inflation have significant impacts on banks' profitability. Additionally, the System Generalized Method of Moments (GMM) model revealed that the annual interest rate (IR), inflation (INF), capital adequacy ratio (CAR), and previous financial performance (Lagged ROA/ROE) have positive and significant effects on both ROA and ROE. In addition, the loan-to-deposit ratio (LDR) had a significant positive effect on ROE, while the non-performing loan ratio (NPLr) had a significant negative effect. The validity and suitability of the GMM regression model used in this study were confirmed by the AR(2) and Sargan Test results. These findings provide valuable insights for decision-makers in the banking sector to respond to changes in monetary policy and manage risks associated with inflation fluctuations. The study emphasizes the importance of capital management and credit risk management in sustaining bank profitability amidst economic uncertainty


INTRODUCTION
The world has been confronted with a variety of issues in recent years, including COVID19 pandemic.The initial COVID-19 outbreak took place in Wuhan, China in December 2019.WHO issued a Pandemic Alert in respect of the COVID19 outbreak, on 11 March 2020 Bayu Firmansyah, Aldi Fajar Fardiansyah, Benny Dhevyanto | 1714 (Sohrabi et al., 2020;World Health Organization, 2019) COVID-19 pandemic has led to global uncertainty across all sectors, economic sector is among the impacted sectors (Nicola et al., 2020).state COVID-19 could have negative repercussions for the worldwide economy.Loss of income, direct effect on production, disruption of supply chain, market collapse, inflation and GDP contraction (Ozili & Arun, 2023;Priya et al., 2021).
The global economy could be damaged by the coronavirus by $2.7 trillion (Bloomberg, 2020).Conforming to IMF (International Monetary Fund), In 2020, global GDP growth will slow to -2.8%.This is a significant drop from 2.8% growth seen in 2019 (figure 1).The COVID-19 pandemic has also caused volatile inflation to rise sharply around the globe (Ozili & Arun, 2023).According to WorldBank In 2022, the Gulf Cooperation Council has invested US$8.3 billion in Africa, indicating a strong interest in the region's potential for development (Wong, F., & Xiao, 2020).It is reported that there are 25 digital banks in the MENA region, serving a total of 25 million people, and it is worth noting that fintech investment in the region was US$819 million in the first half of 2022.Additionally, Saudi Arabia aims to triple the number of fintech companies in the kingdom by 2025, according to a new national strategy launched in 2022.However, despite the economic development they have, they are still facing several issues to deal with, such as conflict in the Middle East, and also high volatility inflation.in Africa between 2019 and 2021, the crisis in COVID 19 may result in a decrease by 23 to 33 % of banking revenue.In the same time, African bank returns on equity may fall by as much as 5 to 15 percentage points due to increases in risk costs and lower margins.(McKinsey et al., 2020).World Inflation rate (Annual percent change) as per IMF, from 2020 to 2022 the world suffered a high volatility inflation rate, 2020 3.2% to 8.7% in 2022 (Figure 2).Based on data that we collected from IMF, the two regions: Africa and Middle East Asia, is the highest inflation rate among other regions.The inflation rate in Africa 2019 9%, 2020 10.6%, 2021 12.8%, 2022 14.3%, whereas the inflation rate in Middle East 2019 6.4%, 2020 9.8%, 2021 12.2%, 2022 14%, the inflation rate of these two regions constantly rising (Figure 2).As a result of high inflation, it led to lower spending power.This prompted African and Middle East Central Bank to develop a new monetary policy.Central Banks utilise monetary policy as a tool to navigate economic volatility and attain price stability (Clarida et al., 2000;Scott, 2005).In many countries, central banks use monetary policy instruments to stimulate growth and achieve the inflation objective.The interest rate, commonly referred to as the policy or cash rate, is one of these key instruments.In order to help maintain (Beck & Levine, 2004).Banks play a crucial part in transmitting monetary policy, a vital instrument employed by the government to attain economic progress without inflation.The national central bank takes charge of managing the money supply, and banks endorse the circulation of money in markets where they function.
Several studies examine bank financial performance determinants (Aebi et al., 2012;Berger & Bouwman, 2013;Cahyaningrum & Atahau, 2020;Kumar & Bird, 2020;Siddique et al., Volatility on Bank Profitability African Bank and Middle East Bank 2021) Some research examines Monetary Policy on bank financial performance (Kumar & Bird, 2020;Meshack et al., 2022).This paper explores the intricate interplay between adjustments in monetary policy, inflation trends, and the profitability margins of banks that operate in African and Middle East regions.We also add bank specific determinants, it is important to consider the role played by bank-specific determinants, given that they are important in determining profitability.This paper aims to contribute to a body of knowledge that could inform policy decisions and strategic planning for sustainable banking in the region, examining the interplay of factors that affect banks' resilience and adaptability to economic disruption, to promote a collaborative and cooperative approach to these challenges.

RESEARCH METHOD
A quantitative research approach is used to assess macro and micro factors affecting banks' profitability, using secondary data, with macro variables obtained from International Monetary Fund and micro variables obtained from banks' annual accounts.We chose 37 banks in Africa and the Middle East for the 2018-2022 period of time.Return on assets (ROA) and Return on equity are indeed widely recognised profitability indicators for banks, prior empirical studies had ROA and ROE as indicators for bank profitability (Al-Homaidi et al., 2018;Hanim et al., 2009) We first used a fixed effects model to determine the most appropriate model for analysing bank profitability in Africa and the Middle East Table 2.The statistical model shows a significant positive correlation between IR and both ROA and ROE at the 0.01 level.This indicates that higher interest rates are linked to increased profitability for banks in these regions.INF, CAR, NPLr, LDR According to this model, there is no significant influence on bank profitability.However, this model shows the results of the Wooldridge Test and Modified Wald Test.Both P-values are less than 0.05, indicating that the null hypothesis should be rejected.This suggests that the fixed effect model has autocorrelation and heteroskedasticity.To ensure the validity and reliability of the regression results, we subsequently utilized the System Generalized Method of Moments.Table 3 The model uses instrumental variables to address potential endogeneity and enhances the reliability of the estimates by employing lagged values of the dependent variables as instruments.The AR(2) test and Sargan test p-values in our sysGMM model were both higher than 0.05, indicating that our model is not affected by second-order autocorrelation and that our instruments are valid.This enhances the reliability of our results.
Lagged ROAs and ROEs are positive and highly significant, indicating that past profitability has strong predictive power of current profitability.This demonstrates the persistence of profitability over time for banks.Higher interest rates are associated with higher profitability, as indicated by the positive and significant coefficient for interest rate in both the ROA and ROE equations.This may be due to the increased income from loan interest, which contributes to the banks' profitability.Inflation (INF) has a positive, significant coefficient in both equations, implying that higher inflation can lead to higher profitability.A possible explanation for this is that banks may be able to adjust the interest rates they charge on loans to compensate for inflation and thus maintain or increase their profit margins.
Bayu Firmansyah, Aldi Fajar Fardiansyah, Benny Dhevyanto | 1720 The capital adequacy ratio (CAR), which measures a bank's financial strength, is positively and significantly related to the profitability of a bank.This may reflect the fact that well-capitalised banks are better able to take advantage of profitable lending opportunities and may also be perceived by depositors and investors as more stable and trustworthy.NPLr in our ROA is not statistically significant, Non-performing loan ratio (NPLr) has a negative coefficient on ROE, indicating that an increase in NPLR is associated with a decrease in ROE.This is due to the fact that non-performing loans represent a cost to the bank and can reduce profitability, which in turn can reduce the return on equity.Loan to Deposit Ratio (LDR) has a positive coefficient in the ROA equation, indicating that a higher ratio of loans to deposits is associated with higher asset returns, this is in line with the assumption that credit is typically the most profitable asset category of a bank.The loan-to-deposit ratio (LDR) has a negative coefficient on ROE, indicating that an increase in the LDR is associated with a decrease in ROE.This suggests that banks that have more loans relative to deposits are likely to have lower ROEs, this may be due to the increased risk associated with a larger loan portfolio, which may lead to higher provisioning for impairment losses and thus lower net income and return on equity.
Figure 1 The mean CAR is 0.186, with a standard deviation of 0.042.The mean NPLR is 0.064, with a standard deviation Volatility on Bank Profitability African Bank and Middle East Bank of 0.079.The mean LDR is 0.777, with a standard deviation of 0.233.
year t, NPLRi,t is Non-Performing Loan ratio bank i in year t, β6LDRi,t is Loan to Deposti ratio bank i in year t.