Digital service transformation in Arab MENA banking: Does it make a difference?

Purpose This study examines the impact of digital service transformation on bank risk in Arab banking systems across the Middle East and North Africa (MENA) region. Design/methodology/approach Using a sample of 157 banks over the period 2008–2021, we construct a bank-level digital service transformation index based on keyword textual analysis of annual reports. Endogeneity is addressed through a two-stage least squares estimation with instrumental variables. Findings Our findings show that digital service transformation significantly reduces bank risk. This risk-mitigating effect is amplified during the COVID-19 crisis, is stronger in foreign-owned banks and is more pronounced for conventional banks than for Islamic banks. Originality/value Unlike prior studies relying on aggregate indices that include digital foundation with digital service, our measure captures the risk-reducing effect of digital services that banks can deploy through third-party arrangements without necessarily owning the underlying technological infrastructure. In addition, the study contributes to the literature by highlighting the role of contextual contingency factors, such as ownership structure, banking model, and crisis conditions.