Oil Windfall and Financial Sector Performance: The Role of Institutions

Abstract

The aim of this paper is to investigate the link between oil revenue and financial sector performance in the major oil-producing economies and to assess the role of institutional variables in shaping this relationship. The approach is taken from two perspectives: macro-level (financial development) and micro-level (banking performance) analyses. The findings suggest positive association between the oil windfall and financial sector performance in OIC countries, while stronger institutional settings have weakening effect on this link. The profitability of Islamic and investment banks are positively related to oil windfall. The findings have important implications for the policymakers and practitioners.