Environmental and innovation indices shape bank profitability in the MENA region

This study examines how the relationship between Global Innovation Index (GII), as a proxy for National Innovation Systems (NIS), and the Environmental Performance Index (EPI) and their interaction with bank profitability across the Middle East and North Africa (MENA) region, using panel data from 406 banks in 20 countries (2010–2023) and unconditional quantile regression (UQR). Results show that GII is negatively associated with both Return on Equity (ROE) and Return on Assets (ROA), with this adverse effect intensifying at higher profitability quantiles. This suggests that innovation is associated with diluted returns in highly profitable banks, possibly due to aggressive scaling or misaligned research and development (R&D) spending. In contrast, EPI exhibits a consistently positive association with profitability, strengthening at upper quantiles. Crucially, the GII × EPI interaction is positive and significant, indicating that strong environmental governance attenuates, but does not reverse, the negative impact of innovation on profitability. These findings advance understanding of the conditional value of national innovation systems in emerging markets, demonstrating that environmental governance moderates the relationship between innovation and profitability. Results indicate that innovation yields financial returns only when embedded in robust environmental institutions, informing policy approaches toward sustainable financial development.