The Efficiency of Financial Institutions in UAE

Subject: Economics
Pages: 7
Words: 1929
Reading time:
8 min
Study level: College

List of Abbreviations

  • AED UAE Dirhams
  • (..) Not Available
  • (-) Zero or Insignificant
  • CB Central Bank
  • LC Local Currency
  • FC Foreign Currency

Money Supply (M0) Currency in circulation + Currency in the Bank

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Money Supply (M1) Money in circulation – Money with Banks + Deposits with local currencies

Money Supply (M2) M1 + Quasi monetary Deposits

Money Supply (M3) M2 + Government Deposits

Certificates of Deposits + Certificates offered by Central Bank to Banks to absorb excess liquidity.

UAE United Arab Emirates

WTO World Trade Organization

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Abstract

Several factors affect the effectiveness and efficiency of the United Arab Emirates (UAE) financial institution. Financial institutions are among the most volatile organizations. Several factors influence their effective operations across the world. UAE is a fast-growing economic point; as a result, its banking sector faces a lot of operational instability. While numerous factors influence efficiency in financial institutions, most of these factors are difficult to determine since very limited data is available. This paper has adopted literature material reviews in the analysis of efficiency measures in the UAE economic region. Most of the materials used in this study are based on researches carried out from 2004. An evaluation of efficiency measures, economic indicators such as human resources, technical, scale and allocation efficiencies were investigated. UAE’s most significant financial institutions are the banks.

DEA approach was applied as the most appropriate method in the analysis of banks’ efficiency measures. UAE’s economic volatility has made its banks have a lot of inefficiencies. However, from the data collected, allocative inefficiency is the highest in the industry. Comparably, scale inefficiency performs the least while pure technical has moderate significance. UAE banks also suffer inefficiencies from employees with limited work experience. Government regulations and ownership raise banks’ inefficiencies since their shares increase inversely with banks’ efficiency scores. The study shows that gender ratios also influence banks’ efficiency. Banks with more women were more efficient than male-dominated banks. Foreign banks and banks with foreign strategic management teams showed more efficiency compared to the locally owned banks.

UAE is a region of a varied economy. The countries in the region have a common cultural setup, economical activities and religion. Most of these countries heavily depend on oil trading across the world. UAE is among the regions with very fast-growing financial institutions. Enabling Governmental regulations, financial products diversity, high demand for Islamic products, and high productivity in the region have attracted many investors in the region. Since 1990, the financial industry has faced changes in technology, deregulation impacts and changes due to globalization. As a result, competition in the industry has heightened. Consequently, small financial institutions were absorbed by larger organizations. This research is aimed at identifying efficiency factors influencing these financial institutions’ operations.

Introduction

Financial institutions are vital in creating monetary flow through deposits and lending. Economic stability relies heavily upon banks’ effectiveness and efficiency in monetary transactions. Control of cash flow, majorly, is under national commercial banks. As a result, most economies, including the eastern economies, fight hard to ensure that their financial institutions are stable. UAE is a region of a varied economy. The countries in the region have a common cultural set up, economical activities and religion. Most of these countries heavily depend on oil trading across the world.

UAE is among the regions with very fast-growing financial institutions. Enabling governmental regulations, financial products diversity, high demand over Islamic products, and high productivity in the region have attracted many investors in the region. Since 1990, the financial industry has faced changes in technology, deregulation impacts and changes due to globalization. As a result, competition in the industry has heightened. Consequently, small financial institutions were absorbed by larger organizations. This research is aimed at identifying efficiency factors influencing these financial institutions’ operations.

Banking Industry

The banking sector is among the industries, which have faced a lot of organizational restructuring. World economic dynamics have brought changes in customers’ behaviors, altered employee needs, new competitive moves and technological needs. The conception of the World Trade Organization (WTO) has greatly impacted banks both positively and negatively across the world. As a result, banks’ stakeholders are obliged to develop new structures, processes and outcome strategies to maximize the available opportunities effectively.

Evidently, WTO has expanded financial institutions’ competitive field; banks are forced to adopt international marketing systems to survive under the enlarged competition ground. Therefore, evaluations and measurements of banking efficacies become an integral part of better market performance. UAE financial institutions being the core of the Middle East Financial stronghold needs to scan their operational efficiencies to beat worldwide competitions. A manager must be equipped with full economic efficiency information prevailing in the industry.

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Studies have shown that UAE banks suffer from allocative inefficiencies while boasting of high technical efficiencies. Further analysis over branching, female employees, foreign ownership and foreign managers positively contribute to the bank’s efficiencies. Government regulatory systems, in contrast, negatively contribute to UAE banks’ efficiencies.

UAE Banking

In most countries just like in the UAE, the prominent financial institutions include its Central Bank (CB), commercial banks, special banks and many smaller financial institutions. UAE Central Bank is the economic regulator. It controls inflations through fiscal policies and act as the main government advisor in monetary issues. Like any other central bank, the bank issues currencies, controls interest rates, controlling reserves and acts as the chief supervisor in the industry. By 2004, the bank had over 67 million in the asset. The same year the bank earning net increased to 35% to 802 million (MENAFN, 2005).

The following Table shows some monetary indicators between 2006 December and 2012 May (Central Bank of the UAE, 2012).

monetary indicators between 2006 December and 2012 May (Central Bank of the UAE, 2012).

Key

  1. With no interbank deposits
  2. No Auxiliary staff
  3. Estimates subject to revisions

The following Table shows UAE Central Bank Balance Sheet from 2006 to 2012.

UAE Central Bank Balance Sheet from 2006 to 2012.

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Key

  1. __ Unavailable
  2. *can be revised

Study Rationality

Many studies have been carried out on factors influencing the banking sector. This has been attributed to the fact the industry is of economic importance. Most studies, however, have mainly been carried out in the developed world. Very few researchers have dedicated themselves to the developing world of Africa and the Middle East. Some of the significant studies carried out in the region plus their failures are discussed in this section.

Sun & Kobeissi carried out research to determine banks’ performance and ownership in North Africa and the Middle East. Data were collected from 221 regional banks. The data were then analyzed to check the impact of structural adjustments and performance in the banks. His work showed that private banks performed better than public institutions. Consequently, the study indicated that foreign banks had better performance than internal institutions (Sun & Kobeissi, 2010). The limitation of this research was that its geographical coverage was too big that a picture of a specific country could not be drawn from its result. Consequently, the data collected were considered too small for the study universe.

EL Moussawi compared the efficiency of banks between those with domestic ownership and those with foreign ownership in Lebanon from 1996 to 2005. In the study, the calculation was based on DEA was applied to calculate banks’ cost-effectiveness and annual resource usage. The result showed that very minimal variation occurred over the groups. However, the efficiency measures showed high performance on foreign institutions. From the study, he concluded that efficiency is separately determined by bank ownership (EL Moussawi, 2009). While EL Moussawi considered his finding to be universal in the whole Middle East, he ignored the regional diversity of the countries. The study also failed to acknowledge the parts played by the government policies and regulations.

The success in the study carried out in Oman by application of financial ratios also brought further questions. In the study, a simple regression technique was applied to compute the findings. During the study, five Omani commercial banks with twenty branches were taken. The result of the study showed that the higher the banks’ total assets, credits and capital, the higher the banks’ profitability. Researches realized that there was a further need for the banks to be categorized under foreign ownership, gender of employees and employees’ years of experience (Berger, 2007)

The study of crises in Japan is another successful research of factors influencing banks’ successful operations. Huge qualitative and quantitative data were collected for the research. Quantitative data suggested that banks are influenced by household factors, micro and macro-economic factors. For easy and accurate analysis, all financial institutions including public and private organizations offering lending and borrowing services were sampled. Consequently, the study showed that government policies have a lot of impact on the development banking sectors (Sohel, 2006). Criticisms have arisen over this research as it does not give a clear picture of developing countries. As a result, a similar study was necessary for developing nations to evaluate the results (Barnum & John, 2006).

Sufian (2009) determined the profitability of banks in the developing economies of Malaysia. In the study, he showed that credit concentration had an impact on the profitability of the banks. On the other hand, banks with higher investments showed higher profitability than those with smaller investments. Lastly, AL-Tamimi (2010) carried out research to find out factors affecting the performance of Conventional and Islamic banks. Regression analysis was applied with independent variables as ROE and ROA. The study showed that banks’ liquidity and concentration ratios affect their performances. A number of branches and their costs affected the performances of Islamic banks. The study in Malaysia prompted research need to analyze how similar factors in a fast-growing economy such as UAE and other slow economies of Africa (Sohel Azad, 2006).

From the study gaps left by the researches, it is evident that there is no study, which brings out a fast-growing developing economy covered by UAE. Significantly, UAE presents both developing nation’s financial institution as well as a fast-growing Middle East economy. On socio-demographic grounds, UAE depicts a good Islamic economy for studies (EI Moussawi 2009). This research can be used to analyze several banking sectors in Asia and Africa. Furthermore, the research aims at filling the major efficiency gaps left by prior researches.

Study Objectives

This research is aimed at minimizing gaps left by most researches. Its goal is to analyze financial institutions efficiencies in the UAE. Most researches available are based on information collected from western world economies, to bridge the gap, the research aims at studying the UAE economy and creating a comparison. The research objectives include:

  1. To find out the major inefficiency variables in the UAE
  2. To find out how inefficiency factors influence the productivity of financial institutions in the UAE
  3. To determine the impact of financial inefficiencies in the national economy
  4. To determine the efficiency measures in a fast-growing economy.

Research Limitation

Since our research relied on literature materials, the research met several obstacles. Most financial institutions’ information is based on the developed western nations. As a result, getting exact information from the target area was met with a lot of difficulties. On the other hand, there are numerous efficiency variables, which are difficult to analyze due to their variations (Mazhar, 2003). Banks do not share most of their internal information and at times the information given might fail to reflect the true picture of the organization.

Most research material in the Middle East was mainly based on large geographical areas but with a limited sample population, thus the conclusion of this paper might fail to give information with the highest degree of accuracy. Managing literature data is not easy; most researches adopted different research methodologies hence harmonizing all these data are very difficult.

References

AL-Tamimi, H. (2010). Factors Influencing the performance of the UAE Islamic and Conventional Banks. Global Journal for Business Research, 4(2), 11-17.

Berger, A. (2007). International Comparisons of Banking Efficiency, Financial Markets, Institutions & Instruments, 16(3). Web.

Barnum, T., & John M. (2006). Biases in technical efficiency scores caused by intra- input aggregation: mathematical analysis and a DEA application using simulated data, Applied Economics, 38(14).

Central Bank of the UAE. (2012). Economic Bulletin, Monthly Banking & Monetary Statistical Bulletin. Web.

EI Moussawi, C. (2009). Bank Efficiency and Foreign Ownership in the Lebanese Banking Sector. Review of Middle East Economies and Finance, 5(2), 7-15.

Mazhar, I. (2003). Development and Performance of domestic and foreign banks in GCC countries. Managerial Finance, 29(2), 6-19.

Middle East North Africa Financial Network Newsletter (MENAFN). (2005). Newsletter. Web.

Sohel Azad, A. (2006). An Empirical Analysis of Factors Affecting Bank Crises in Japan: Learning Pints for Bangladesh. Bangladesh: Bank Parikrama.

Sufian, F. (2009). Factors Influencing Bank Profitability in Developing Economy: Empirical Evidence from Malaysia. Global Business Review, 10(2), 4-13.

Sun, X., & Kobeissi, N. (2010). Ownership Structure and Bank Performance: Evidence from Middle East and North African Region. Comparative Economic Studies. Web.