Financial Market Development and Financial Stability in MENA: The Moderating Role of Renewable Energy

Abstract

This study examines the relationship between stock market development and financial stability across 16 MENA countries over the period 1995–2025, with particular emphasis on the moderating role of renewable energy consumption. This study conceptualizes stock market return and market capitalization as important dimensions of financial-market development that can influence financial stability through capital mobilization, liquidity, risk diversification, and improved investment opportunities. Using annual panel data obtained from the World Bank Global Financial Development Database and World Development Indicators, financial stability is measured through the bank Z-score, while renewable energy consumption, stock market return, and stock market capitalization constitute the principal explanatory variables. Bank capital, net interest margin, nonperforming loans, liquidity risk, economic growth, and inflation are included as control variables. The empirical analysis employs a dynamic panel framework using the System Generalized Method of Moments to account for persistence in financial stability and potential endogeneity among the explanatory variables. The findings indicate that financial stability exhibits strong temporal persistence. Stock market return has a positive and statistically significant relationship with financial stability, whereas market capitalization remains positive but provides weaker statistical evidence. Renewable energy consumption has a positive and significant direct relationship with financial stability. More importantly, the interaction between stock market return and renewable energy consumption is positive and significant, indicating that renewable energy strengthens the association between stock market performance and financial stability. In contrast, the interaction between market capitalization and renewable energy consumption is statistically insignificant. Among the control variables, net interest margin and economic growth are positively associated with financial stability, while liquidity risk and inflation exhibit negative relationships. The findings highlight the importance of integrating financial-market development with sustainable investment and macroeconomic stability in strengthening financial-sector resilience across MENA economies.