On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach

•The dynamic interaction between revenue diversification and bank market power is examined.•A sample of commercial banks from MENA countries over the period 1993–2014 is used.•The panel vector autoregression (PVAR) model in a Generalized Method of Moments (GMM) framework is employed.•There is a bidirectional causality between revenue diversification and bank market power.•New insights on the bank market power-revenue diversification nexus are detailed. The dynamic interrelationship between income diversification and bank market power: evidence from MENA countries. [Display omitted] This paper investigates the dynamic causal relationship between revenue diversification and bank market power using a broad sample of commercial banks from 17 Middle Eastern and North African (MENA) countries over the period 1993–2014. To do so, we employ the panel vector autoregression (PVAR) approach in a generalized method of moments (GMM) framework. Moreover, we use the impulse response functions (IRFs) tool to better understand the reaction of bank market power aftershocks on revenue diversification and vice-versa. Finally, we supplement our analysis by the forecast error variance decompositions (FEVds) of our variables. Overall, the results show that the level of bank market power declines in response to positive revenue diversification shocks. Conversely, banks with a higher level of market power get more involved in non-traditional activities.