The Financial Sector and UAE’S Economy. Analysis

Subject: Economics
Pages: 20
Words: 12689
Reading time:
46 min
Study level: College


The financial sector and UAE’S economy as a whole have experienced a remarkable growth since the global crisis. Banks have embraced technology and have expanded to offer customers easy access to products and services. However, there have been inefficiencies resulting from competition, poor risk management and poor quality of assets. This sector is extremely significant to the UAE’s economy since it is the second best performer after the oil sector. Other inefficiencies occur in the real estate markets, the returns on assets and the total margins, which may slow down growth. Focusing on these inefficiencies helps the institutions in this sector anticipate for challenges and plan well.


The banking sector throughout the world has experienced a lot of crises. This is attributed to poor banking practices, inadequate revenue diversification and capital, credit risks and currency mismatches among others (Tektas & Ozkan-Gunay, 2006). These shortcomings prompted the introduction of liberalization and reforms in the banking sector in 1991 (Rao & Tiwari, 2008). The reforms aim at solving the major challenges that have stricken the economies of various countries. This research focuses on the United Arab Emirates (UAE). This is a federation that comprises of seven emirates. The emirates are governed under the same authority. The emirates include Abu Dhabi, Sharjah, Dubai, Fujairah, Umm al-Qaiwain, Ajman, and Ras al-Khaimah. The economy relies on exporting oil to the foreign countries around the world. Many immigrants have migrated to UAE making a population of about 8.2 million. The federation has managed to maintain a stable economy. In 2011, it was ranked as the fourteenth best country in doing business. In addition, it has put up infrastructure that offers services to citizens. The infrastructure includes the financial institutions. However, the Emirates have experienced economic crisis that affects the financial institutions. Particularly, it affects the commercial banks around the federation.

The federation has about eighteen prominent commercial banks that offer services to the citizens. They are distributed in the federation evenly ensuring that the services reach most of the citizens. However, the banks incur financial crisis that leads to economic degradation. For example, the banks experienced a tragic financial crisis in the year 2007. During the year, the economy weakened four percent where the banks’ outputs shrank. The effects of this financial crisis are in force currently. This crisis is attributed to the government delaying payment of debt to the banks. As a result, the banks incur deficiency of funds and capital to learn their business. This has caused a major economic drawback within the economy of the federation.

Consequently, the investors have refrained from investing in the emirates. They fear the negative reputation of the banking system. They assert that the main causes of the outlook are the challenges related to the quality of assets and low provisions. The investor argues that the banks have been exposed to the financial stress that emanates from the government issuers. They predict that the loan problems will continue rising and degrading the efficiency of commercial banks. Reports from Moody investors suggest that corporate will impair the financial capability of the banks in Dubai. It foresees a growing divergence in the banking system between Dubai and Abu Dhabi. The investors suggest that the two main cities will adopt diverse systems that will lead to great economic difference. They argue that Abu Dhabi’s banking system will benefit from high public expenditure. On the other hand, Dubai will be dragged by supplying their services to the real estates. They, also, identify various weaknesses in the structure of the bank systems. The weaknesses include insufficient transparency, impaired credibility, exposure to parties, and deposit concentrations. As a result, commercial banks will be exposed to credit risks for the next one and a half years. This will call for an economic recession that will reduce peoples’ expenditure and lower the oil prices significantly. Consequently, the banks will experience low foreign and local transactions leading to their degradation. It will, also, reduce the confidence of lending by the banks. Therefore, the country will experience a massive economic imbalance especially to the banking system. This scenario will be a major constraining factor to the success of the commercial banks within the federation.

This research, therefore, seeks to research on various key issues that relate to the UAE banking system. These factors include the key drivers of banking inefficiency. It will close the gap that has been created in the past researches. As a result, it aims at identifying factors affecting the efficiency of financial institutions in the UAE.


The research objectives include:

  1. Establishing the major in efficiency variables of banking in the UAE
  2. To find out how the inefficiency factors affect the financial sector in UAE
  3. To establish the effects of the financial inefficiencies on the national economy
  4. To establish measures that can be created to solve the issues experienced in Banking

Banking Industry

Dynamics in the world economies have resulted in changes in customer behavior, changes in employee needs, advance technology and a lot of competition among the financial institutions (Hu, 2008). The conception of the World Tourism Organization (WTO) has significantly impacted on banks both positively and negatively across the world. It is evident that the WTO has expanded the financial institutions competitive field (Rao & Tiwari, 2008). The UAE’s economy heavily depends on the oil sector and the continued growth and expansion of the segments in the financial sector (Mosesov & Sahawneh, 2005).

UAE commercial banks

The UAE Banking sector experienced a growth of about 30% between 2005 and 2007. The loans grew by 32% reaching a total of USD 609 in the close of 2008. However, the deposits experienced a slow pace of 27% and reached USD 725 at the end of 2008. The country’s growth and profitability were hindered by inadequate wholesale funds available during the global crisis. The investment portfolio securities were also under pressure. The performance of the UAE banks was materially impacted by the global crisis. The area that was affected most is the returns generated from total assets. Other areas include the reduction in the total margins and slow growth. This affected both Islamic and non-Islamic banks both local and international (Mehta, 2012).

It is evident that the financial sector is focusing on reaching a greater number of customers through expansion. This sector has benefited from the advanced technology and concentrates on quality customer service. Competition has also increased as foreign investors have joined the industry. This industry has grown due to the increase expatriate population. Both domestic and foreign banks have invested a lot in low cost distribution channels like internet banking and automated teller machines. The figures moved from AED 192,532 million to AED 334,743 million. The Islamic banks have exhibited mixed characteristics: some have fast growth while others are slow. Dubai Islamic Bank (DIB) and Abu Dhabi Islamic Bank are the largest in terms of market capitalization. They are also the most traded of all the domestic banks. Therefore, they have potential for fast growth registering about 77-83% in asset growth. However, they have low loan deposit ratios of 63-81%. This implies that they attract deposits easily, but are very conservative on the issue of loan approval. According to the financial valuations, the UAE domestic banks in general are mixed with and have the lowest market capitalization when compared to deposit ratios in the world. The dividend yields are reasonable although there is a great potential to grow dividends in the future. For these banks to increase on their financial performance there is a need to balance deposit growth with lending (Hashmi, 2007).

The banking system in the UAE has developed to include 23 commercial banks as of 2011 with a branch network of about 768. The electronic customer service units were 26 and this is a significant growth in the UAE’s banking system. In 2011, Deutsche Bank AG and the Industrial & Commercial Bank of China acquired a license to operate wholesale banks. There was also an addition in investment banks: Arab Emirates Invest Bank and HSBC Financial Services Limited that began their operations in the same year. This is an indication that the international investors are attracted to invest in the UAE.

Significance of the Study

Many studies have been carried out to determine the factors affecting the banking sector. Although these studies have been carried out in the developed nations, it is evident that the banking sector is important in the economies. Kobeissi & Sun (2010) carried a research to determine the bank’s performance and ownership in North Africa and Middle East. This study showed that private banks performed better than the public ones. The study was limited by the geographical coverage, and thus the data collected was considered to be too little. On the other hand, Hamadi & Awdeh (2012) carried out a research to compare the performance of domestic banks with that of the foreign ones in Lebanon. This study discovered that there existed a very minimal variation. However, this study assumed that the findings were universal for the whole of the Middle East. It disregarded the regional diversity in those countries.

Another study carried out in Japan indicated that governmental policies influence the banking sector a lot. However, this study was inadequate since it is not applicable in the developing nations (Hanazaki & Horiuchi, 2003). Sufian (2009) determined the profitability of banks in the developing economies of Malaysia. This study showed that credit concentration had an impact on profitability of the banks. Therefore, profitability was determined by a bank’s level of investment. Lastly, Al-Tamimi & Charif (2011) identified liquidity and concentration ratios as the factors affecting performance of conventional and Islamic banks. Branch numbers and their costs also affected the bank’s performance. From the study gaps left by researchers, it is evident that the fast growing developing economy of UAE has not been covered adequately. On socio-demographic grounds, the UAE depicts a good Islamic economy for studies (Hashmi, 2007). This research can be used to analyze several banking sectors in Asia and Africa.

The banking sector contributes a lot to the UAE’s economy as it is second after the oil production. Therefore, it is essential that the challenges affecting this sector to be addressed to ensure that the chances of experiencing crisis are minimized. It will also help in establishing whether the structural reforms that have been put in place have contributed to the growth experienced in the economy. Since the UAE’s financial sector was affected by the global crisis in the past, this study is relevant in establishing the causes of such crisis. It helps in illustrating the various factors that are likely to cause under performance by the financial institution. This information is suitable for institutions to anticipate for future challenges and plan on ways to counter such challenges.

Study questions and hypotheses

This research is aimed at minimizing gaps left by most researchers. 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 create 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 UAE
  3. To determine the impact of financial inefficiencies in the national economy
  4. To determine the efficiency measures in a fast growing economy.

List of Abbreviations

  • AED UAE Dirhams
  • DEA Data Envelopment Analysis (to analyze banks’ efficiency)
  • (..) Not Available
  • (-) Zero or Insignificant
  • CB Central Bank
  • LC Local Currency
  • FC Foreign Currency
  • Money Supply (M0) Currency in circulation + Currency in the Bank
  • 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 the Central Bank to Banks to absorb excess liquidity.
  • UAE United Arab Emirates
  • WTO World Trade Organization

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.

Literature Review

The global financial sector has witnessed forceful pressure since the international fiscal structure is developing fast owing to the effects of the creation of the Global Trade Association. “Deregulating the financial sectors and financial services, the increasing use of information technology, and the huge speed of dispensing financial information are also among the factors leading to re-evaluate and restructuring of financial institutions worldwide” (Hossein & Lamia, 2010, p. 20). In light of these developments, players in the financial sector are increasingly monitoring the efficiency of monetary institutions in dispensing fiscal services. The UAE financial segment is no exception. The economic stability of the Middle East region relies on the UAE monetary institutions. Assessing the efficiency of the UAE fiscal segment can help determine its level of preparedness to deal with its global competitors who may soon be interested to extend their presence in the UAE market. The UAE hosts around forty-seven banks; twenty-two of them are countrywide banks. Five of the countrywide banks operate in line with the Islamic principles. The twenty-five remaining banks are multinational. “The Central Bank of the UAE advises the government on monetary and financial issues, issuing currency, maintaining gold and foreign currency reserves, formulating credit policy and providing regulation and supervision” (Hossein & Lamia, 2010, p. 14). The banking sectors in developing nations need serious examination since they lack a standard ‘transitory trend’. Many fiscal analysts have examined the USA, EU and Japan monetary institutions; however, there is a dearth of analysis on the efficacy of the monetary institutions in transition. This has led to inadequate literature on the efficiency of transition economies. Much information is available that aims at revealing factors that influence the fiscal performance of banking institutions. In many cases, “bank profitability, is measured by the return on assets (ROA) and/or the return on equity (ROE), is typically expressed as a function of internal and external determinants” (Allen & David, 1997, p. 56). Thus, this literature review seeks to determine the factors that affect the efficiency of the financial institutions in the UAE.

According to Forsund and Hjalmarsson, “efficiency refers to a statement of the performance of processes that transform a set of inputs into a set of outputs which determine bank efficiency” (Forsund & Hjalmarsson, 1974, p. 89). Indeed, efficiency involves comparison of a financial component against a standard component. Technical efficiency refers to the changing material inputs like services of personnel and equipment into outputs compared to best practice. This implies that the current technology prevents the misuse of inputs at all in producing the specified amount of output. A best practice firm should have 100 percent technical effectiveness. A company whose efficiency is below 100 percent is partially efficient. Administrative practices and the level or magnitude of functions influences technical effectiveness. Essentially, Data Envelopment Analysis assists in recognizing yardsticks for which monetary institutions can aim their performance (Hu, Su, & Chen, 2008, p. 84). Firms that are not well organized can embrace the operations of the efficient companies that are on the well-organized frontier by applying the best input and output combination. The best practices of well-organized firms if adopted can reorganize the unproductive company’s management and operations to advance its own performance. This analysis assists in understanding the nature of a company’s efficiency; hence, it offers important guidelines for studying the determinants of UAE monetary efficiency.

Hossein and Lamia compared the efficiency of the monetary institutions in the UAE with those established in the Gulf Cooperation Council (GCC). The study was carried out from 2000-2005, and it involved the assessment of how efficient Islamic financial institutions are compared to Conventional banks. The study employed non-parametric methodologies and productivity index in measuring the effectiveness of the banks. According the findings of this study, banks operating in the GCC demonstrated comparable levels of effectiveness. Financial institutions operating in Kuwait and Qatar were more efficient than the UAE were. On the other hand, the UAE banks proved to be more effective and productive than the rest of the GCC banks. The bank of Dubai followed by the Abu Dhabi bank was the most efficient commercial bank according to this study. During the analysis, UAE banks registered a remarkable level effectiveness of 4 percent, but the GCC banks showed decline of effectiveness of similar magnitude. The UAE banks performed well in both technical pure efficacies; however, they were weak in scale of effectiveness. The legal framework in which these financial institutions operated influenced their level of growth and efficiency. The efficacy of the GCC banks fluctuated because they rely much on the oil proceeds, which are not stable due to the unstable oil prices. “While previous studies have consistently shown the higher efficiency of GCC Islamic banks over their conventional counterparts, this analysis show inconclusive results concerning the comparative numerical efficiencies of Islamic versus conventional banks at both the UAE and the GCC levels” (Hossein & Lamia, 2010).

Khalid assessed the performance of the Saudi Arabian monetary sector in 2007. He used the Data Envelopment Analysis (DEA) as a key tool for examining the efficacy of the banks in this country. “Data Envelopment Analysis is a linear programming model that measures the efficiency of Decision Making Units (DMUs) in multiple-inputs and multiple-outputs setting” (Khalid, 2010, p. 53). The results indicated that Saudi financial organizations were generally thorough in managing their fiscal resources. “The empirical results revealed that the mean efficiency of the Saudi Arabian banks during the year 2007 was 86.17 percent and 93.9 percent as per Charnes–Cooper–Rhodes (CCR) and Benefit Cost Ratio (BCR) approach respectively” (Khalid, 2010, p. 57). “Benefit cost ratios (BCR) indicate the potential connection between profit and expenses, both quantitative and qualitative, of undertaking new projects or replacing old ones” (Khalid, 2010, p. 55). “In the DEA approach, previously formulated by Charnes, Cooper and Rhodes (CCR), effectiveness is defined as a weighted sum of outputs to a weighted sum of inputs, where the weights structure is calculated by means of mathematical programming and constant returns to scale (CRS) are assumed” (Khalid, 2010, p. 55). Thus, it is imperative to perform a similar analysis in the UAE in order determine how its monetary sector has performed in the recent financial years.

Casu and Girradone conducted frontier efficacy investigation of some monetary firms operating in Italy. The survey aimed at giving an in-depth evaluation of the experiential estimations of bank efficacy. The survey findings demonstrated that various approaches of assessing efficiency do not automatically yield dependable results. For instance, the impact of amalgamations on profit effectiveness has not given consistent results. In some cases, mergers led to profitability of the financial institutions, while in some situations it led to significant losses (Casu & Girardone, 2002, pp. 3-20). In general, depository monetary firms such as banks and credit unions analyzed in this study registered approximately 77 percent. The resemblance in the average effectiveness of financial institutions across various frontier models did not have any significant difference with the positions of individual companies by their effectiveness levels across models. “This suggests that estimates of mean efficiency for an industry may be a more reliable guide for research purposes than are estimated efficiency rankings of firms and that analysis of the causes or correlates of efficiency should be viewed with caution” (Casu & Girardone, 2002, pp. 2-19). Although this study applied multiple approaches in analyzing the effectiveness of monetary firms, it lacked information on the issues that affect the effectiveness of monetary institutions.

Hussein attempted to find out the primary factors that determine the success of the Islamic banks operating in the UAE as compared to the commercial banks in that region. This study took place from 1996 to 2008, and it applied a regression model that involved application of both the return on equity (ROE) method of analysis and the return on assets (ROA) approach. The outcome of the analysis revealed that the level of a bank’s cash flow and concentration mainly influenced the effectiveness of the performance of national monetary firms. On the other hand, the operation costs and the number of outlets were the primary factors that affected the success of Islamic banks. In the UAE, the favorable operating costs of Islamic banking have influenced some conventional banks both national and international to shift to Islamic banking in order to remain competitive and profitable (Hussein, 2008, pp. 16-23).

In 2004, Fatima and Hassan measured the efficacy of the UAE monetary firms and identified the factors influencing their success. Their descriptive examination of the UAE monetary segment indicates that it is vibrant and greatly advanced in the organization and size and it uses sophisticated banking technology. The government bolsters the UAE monetary sector and this has enabled it to maintain a high standard of effectiveness. For instance, the government uses the vast resources of the UAE to support the monetary sector when it faces losses. The success of the UAE monetary segment is also due to the absence of serious competition from foreign banks have not fully infiltrated the UAE market. Nonetheless, “the empirical results of efficiency measures indicate that the UAE banks’ overall average of cost efficiency is quite low as compared to those of the developed countries” (Fatima & Hassan, 2004, p. 35). The outcome further revealed that the government’s influence and investment in the monetary sector negatively affects the monetary sector. Lastly, “the results indicate that the UAE banks are able to use their input resources more efficiently when they have more branches, and that newer banks are performing better than older banks on average” (Fatima & Hassan, 2004, pp. 38-39). A similar assessment was done in China which gave comparable outcomes. Lee, Cheah and Koay examined the technical effectiveness of monetary institutions in Malaysia in 2001-2005 (Lee, Cheah, & Koay, 2011, p. 17). Their assessment revealed that newly created private banks in Malaysia were more technically effective than government owned conventional banks. The outcome was comparable another analysis by Roman and Anita who found out that the government owned banks demonstrated lower effectiveness than the private and foreign banks (Roman & Anita, 2004, p. 234). The study recommended that the Malaysia should reorganize its local banking activities in readiness for an international competition because the banking industry is becoming more dynamic. However, the study fails to give suggestions for bridging the structural gaps witnessed in the monetary sector of the UAE.

Enur and Arzu applied the DEA methodology in gauging the level of efficacy of conventional national monetary institutions that operate in countries with transition economies like Chile, Mexico, Thailand, Indonesia, and Malaysia among others. They also aimed at finding out how policies influence the operations of national banks. The survey indicated that banks that command a huge market share are more effective compared to those that target small markets. They also revealed that financial institutions operating in nations with vibrant economies tend to be more efficient since they are able to get more deposits that enable them to have a steady liquidity. “The study revealed that while privatization of state-owned enterprises, enterprise competition and corporate governance related improvements are important in boosting commercial bank efficiency, the securities market and non-bank financial institutions development hinders the efficiency of banks” (Enur & Arzu, 2006, p. 481). The management practices and policy goals of a given financial institution affect its capacity to excel in its monetary activities. “This survey reveals some of the efficiency determinants that the UAE financial organizations are likely to experience; they include the level of liquidity, credit risk, capital adequacy, operating expenses management, and bank size” (Enur & Arzu, 2006, pp. 483-485). Internal determinants of financial success are greatly affected by management practices of a financial institution. Management decisions automatically determine the operating outcomes of monetary institutions. Outstanding management practices culminate into good performance of a given financial institution. Nonetheless, it is not very easy to examine administration quality directly. Indeed, it is totally presumed that good management practices would be revealed by the operating performance. Consequently, it is not strange to scrutinize the fiscal performance of a bank by assessing its monetary variables established in its financial statements such as the balance sheet and revenue reports. Balance sheet records are common pointers of the revenue generation capacity and the cost of financial institutions. “The determinants that receive more attention in the banking literature are costs, asset and liability composition” (Enur & Arzu, 2006, p. 486). The capital ratio is one of the primary instruments for gauging the bank costs and external determinants mainly involve the microeconomic arena within which a given monetary institution operates.

Finally, the recent international monetary crisis had serious ramifications that the UAE monetary institutions had to grapple with. Maher and Jemma did a comparative assessment of how Islamic banks and national financial institutions operated during the crisis (Maher & Jemma, 2010, pp. 12-29). Specifically, they scrutinized how the crisis influenced the productivity and asset development in various countries that have these two categories of banks. The study showed that the financial crisis had varying effects on these two financial institutions. Islamic banks were able to mitigate the ramifications of the crisis while the conventional banks were the hardest hit. In particular, the Islamic banks remained stable since they adhered to the Islamic banking guidelines that barred them from venturing in some of the investment schemes that led to serious losses among conventional banks. Therefore, the global monetary crisis acted as a litmus paper for testing the efficiency and resilience of Islamic banks. The crisis revealed the urgent need to solve important constraints in the Islamic Banking services. The crisis has further led to a greater acknowledgment of the significance of liquidity perils, and the necessity for well-organized bank resolution structure. Therefore, creating a properly performing liquidity administration system is a key priority. Moreover, controllers and quality-managers for Islamic Banks should make sure that the decision-making and lawful infrastructure, as well as for bank decree, remain pertinent to the fast altering Islamic monetary landscape and international developments. Improvement initiative in this case should be in line with the worldwide restructuring program. Better convergence and coordination of guidelines and products is required to enhance a well-organized and sustainable development of the banking sector.

The above literature review demonstrates that the efficiency of each bank outlet and the effectiveness of the daily banking process determine the general effectiveness of conventional firms. Thus, a bank that is aiming at attaining a high level of overall efficiency should first ensure that the sub factors are well coordinated. The effectiveness indicators are in service proceeds per division, spread per local office, deposit per outlet, and advances per outlet (Nageshwar & Shefali, 2008, pp. 74-89). The branches operating in remote areas can produce better outcomes if they are properly structured. The streamlining of the banks should focus on mitigating the overall operating costs in order to boost the productivity of national banks. The managers of conventional banks can encourage their staff to go for early retirement as a way of minimizing operation costs. Adoption of the current banking and computer technology can significantly improve the competence of the bank personnel. National banks should avoid creating several outlets because they lead to high operating expenses. Consequently, “it is a matter of vital importance for bank managers, bank regulators, and the Central Bank authority of the UAE to get full information about the bank’s economic efficiencies” (Chang & Chiu, 2006, p. 634). This is because ineffective banks are likely to make serious losses, which may make them less competitive in the already saturated banking industry. The effectiveness of the monetary institutions also influences the development of the economy (Ashish & Sunil, 2012, p. 102). In other words, if banks are ineffective, the economy tends to perform poorly. Lastly, it is worth noting that effective banks are the only ones that can cope with the ever-increasing competition in the global financial arena.

I have contributed to this research by examining various publications and research works on the primary determinants that are likely to influence the efficacy of various financial institutions based in the UAE. Most of the publications reviewed in this study have focused on the efficiency determinants that affect the financial institutions in both developed and developing countries. This has enabled me to identify a number of gaps in various articles that describe financial efficacy; hence, I have made informed recommendations that can be applied by UAE monetary institutions to realize better efficiency in their financial operations. Therefore, I contend that mitigation of expenses enhances the performance profile of many monetary firms because it improves the amount of revenue that a given bank can realize. Evidently, the proficient cost administration is a precondition for the increased productivity of the monetary system. This implies that if banks adopt better management strategies then they stand better chances of realizing good profit margins. Reducing the charges for deposits can improve the operational effectiveness. This cost can possibly be mitigated by reorganizing the deposit mix or by increasing the amount of cheap deposits in overall deposits.


For the study of the factors affecting efficiency in financial institutions within the UAE, the study formulated a couple of questions to facilitate the meeting of the objectives of the study. This research is aimed at minimizing gaps left by most researches of the past. Its goal is to analyze financial institutions efficiencies in the UAE. Most researches available are based on information collected from western world economies and to bridge this gap, the research aims at studying the UAE economy and creates a comparison (Bos et al., 2005; Ozkan-Gunay and Tektas, 2006). The research objectives include finding out the major inefficiency variables in the UAE financial institutions, to find out how inefficiency factors influence the productivity of financial institutions in UAE, to determine the impact of financial inefficiencies in the national economy and to determine the efficiency measures in a fast growing economy (Al Shamsi, Aly & El-Bassiouni, 2009).

Using a nonparametric approach there will be an assumption that the variables used are non-negative to counter the possibility of negative data (Squalli, 2006). Through examination of deposits, labor and capital as the inputs, and investments and loans as outputs, there was the examination of efficiency using DEA in analyzing of income statements and balance sheets. The DEA system was chosen for the study because of its relevance in the determination of the specifics of decision-making units (DMU) of inefficient and efficient institutions. The DEA system helped with the creation of a standard for setting efficient banks and compared with their less efficient peers. This produces scores of 0 or 1. Efficient banks had a score denotation of 1 while the efficient ones were denoted 0.

Efficiency = input/output.

Using the DEA methodology, inputs weighted against outputs and by studying the N in DMU within the financial institutions, inputs are represented by n and outputs (Henderson & Hainsworth, 2007).


The sample size consists of 18 banks of UAE banks. It is important to use a sample size, which is not in excess of available variables. The study will cover data from the bank records and databases. Details of the balance sheet and income and expenses will be extracted from the Arab Emirates databases for the period of 2010-2011 financial years. The study will use balance sheets and other financial reports provided by the banks. Only five out of the 18 banks used in the sample, reported consistent output and input variables required for the analysis of the period of 2010-2011 of the banks in the UAE (Anouze and Yorke-Smith, 2010)

For the analysis of efficiency issues, there will be an analysis of output and input variables. There is no input and out variables expressly qualified for efficiency studies in the financial sector. However, the acceptable choice of examples for use in this study will be considered Input as Personnel expenses, Administrative expenses, Non-interest income, Price of Fixed Assets, Price of Labor, Price of borrowed Funds, Equity and outputs as Total deposits, Total loans, Total securities, Interest income, Interest expenses, Securities and Customer Loans (Bos et al., 2005; Ozkan-Gunay and Tektas, 2006).

Part of the sample consisted of the consolidated financial statements for the year ended 31 December 2011 and reports. These were for Bank of Sharjah P.S.C reports, Commercial Bank of Dubai PSC, Invest Bank PSC, National Bank of Fujairah P.S.C, National Bank of Ras Al-Khaimah (P.S.C.), Rak Bank, ABU DHABI COMMERCIAL BANK P.J.S.C. 5 and Abu Dhabi Islamic Bank PJSC Report of the Board of Directors and Mashreq Annual Report 2011. Overall, there will also be an analysis evaluation of these 18 banks in the UAE:

  • ADIB Abu Dhabi Islamic Bank
  • ADCB Abu Dhabi Commercial Bank
  • BOS Bank of Sharjah
  • CBD Commercial Bank of Dubai P.S.C
  • CBI Commercial Bank International
  • DIB Commercial International Bank (Egypt)
  • EIB Emirates Islamic Bank
  • FGB First Gulf Bank
  • INVESTB Invest Bank
  • MASQ Mashreq Bank P.S.C
  • NBAD National Bank of Abu Dhabi
  • NBF National Bank of Fujairah P.S.C
  • UBQ National Bank Of Umm Al-Qaiwain (PSC)
  • SIB Sharjah Islamic Bank
  • UAB United Arab Bank
  • UNB Union National Bank


The SERVQUAL instrument is the choice for this study. It has two sections that can be used to measure efficiency expectations within an industry and that for measuring service perceptions within the industry. This is consistent with previous studies and this will be carried out using the questionnaires developed for the study completion (Anouze and Yorke-Smith, 2010).The definition of efficiency described in this study is determinable through the evaluation of expectations and perceptions of efficiency in the financial institutions of the UAE. This is weighting the efficiency expectations and perceptions in relevance to the efficiency received within the financial institutions. The questionnaire used test the importance people have on the provision of efficiency by financial institutions (Hassan Al-Tamimi, 2010).

This relates to various demographics such as gender, nationality, age, education and years of service reception. Its second section involves itself with the understanding of specific issues of tangible dimensions, reliability dimensions, assurance dimensions, empathy dimensions and responsiveness dimensions. These are averaged into five dimensions for measuring efficiency with an overall question to measure efficiency as an overall concern for this study. Because of the context of the study, the presentation of the questionnaires is in Arabic and English. This is to counter the challenge of those not conversant with English that may exist with some of the customers. For the validation of the scales, there is consultation of three academics and two practitioners (Hassan Al-Tamimi & Lootah, 2007)

To examine the hypothesis of the study, there will be an evaluation of the performance of and efficiency of the banks under study for a given period. There is a representation of production functions to represent efficiency with estimations and evaluations through Data Envelopment Analysis (DEA). The use of DEA is mathematically inclined in the measure of efficiency (Bos et al., 2005; Ozkan-Gunay and Tektas, 2006). The calculation of non-parametric frontiers involves evaluation of decision-making units (DMU) such as banks in the UAE in this study. The principle of the DEA will focus on productivity and efficiency. If bank C can use X (C), input for the production of Y output units other banks should be in a position for the same standards for efficient operation. Similarly, when bank Z spends an amount of inputs that is equal to X (Z) giving rise to Y (Z), the situation means that the manufacturer has the acumen to produce equal amounts (Henderson & Hainsworth, 2007).

By using DEA, there are no functional generalizations. DMUs can be within the range of the frontiers or they have to stay below. Bank B and C will be combined to create a comparison of the inputs and outputs for analysis. These sets will be compared with the inefficient bank. For all the efficiencies of DEA and DMU, the study makes an identification of their sources and the reasons of inefficiency (Bos et al., 2005; Ozkan-Gunay and Tektas, 2006).

Table 1: Selected choices of Input and Output Variables in Efficiency study (Berger, and Humphrey, 1991; Berger and Mingo, 1997).

Output Input
Trading account securities Premises & fixed assets
Total deposits Administrative expenses
Total loans Equity
Total securities Personal expenses
Interest income Interest expenses
Non-interest income Price of labor
Customer loans Price of the funds borrowed
Securities Employee salary
Loans Capital
Interbank loan Price of funds,
Demand deposits Deposits
Earning assets Price of capital
Loans and discounted bills Personal expenses
Loans, securities and investment Salary expenses
Amounts of commercial loans Purchased funds
Amounts of real estate loans Purchased funds
Number of demands for deposit accounts Expenses on materials

Design and statistical procedure

Both financial and banking institutions are dependants on each other for efficient performance. That intrigues the need for the evaluation of the factors that influence their efficiency. There are two constituents’ models of DEA being the CCR and BCC. For objective identification of the sources and capacities of inefficiency in the banks, CCR becomes an important tool On the other hand, the BCC model helps in the distinction of scale and technical efficiencies through estimation of scales of operation determining the presence of increases and decreases present (Henderson & Hainsworth, 2007). We use the BCC has proven for its relevance in similar studies for the identification of efficiency while the CCR model facilitates productivity study. For this reason, the BCC produces more DMUs as efficient and overweighs the productive DMUs produced by CCR. This can be presented using DEA in determining the capacity of decision makers in input and output determinations (Zaki, Bah & Rao, 2012).

The model used in similar studies is that containing previous variables such as the return on equity (ROE) and the return on assets (ROA). According to Sinkey (2002), these are the best models to use in the determination of the efficiency of financial institutions. The use of these variables in the study produces alternate seven variables, which are independent and can be justified as such (Charnes et al., 1978). The economic conditions are measured using GDP per capita and will be taken as the initial variables. There is adequate exploration of DEA in literature with its common use in the analysis of efficiency (Wang, 2009, Beck et al., 2008). Size is another variable, analyzed through determination of total; assets. There is the expectation of the size of a bank and its efficiency; there can be a reduction in costs so that performance improves and leads to maintenance of efficiency (Hassan & Al-Amiri, 2003).

Another variable is FIR and it is the key measure of financial development. The fourth variable for the study is liquidity and this means that if a bank is liquid efficiency goes down and vice versa. Number five is concentration determined by measuring the assets of Islamic and conventional banks’. A positive relationship exists between efficiency and concentration of financial institutions (Delis and Papanikolaon, 2009). Cost forms the sixth variable where high costs lead to less efficiency. The last variable is the number of a bank’s branches, which makes a determination that if a bank has more branches, it has a better efficiency than in cases when it has a few branches. Because of these variables, this study used a regression model (Henderson & Hainsworth, 2007).

However, the chosen method for this study is the DEA and the CCR model. The CCR model is appropriate for the study because it facilitates the possibility of conducting a comparison between the financial institutions in the region through CRS. The comparison takes place in the evaluation of the efficiency between large and small financial institutions among our sample (Charnes et al., 1978). Berger et al., (1997) asserted that in a sample with a couple of larger institutions using VRS provides a possibility of the large institutions being more efficient that smaller institutions this is for the fact that there are no exclusively efficient institutions. For the fact that our sample is a mix of small and large financial institutions, it is practical to adopt the CRS framework for the study. The models used are the DEA profitability efficiency model, ratio analysis model and DEA operating efficiency model (Kashani & Obay, 2010).

For the operating efficiency model, there was an examination of the operation of the institutions focused on the operational expenses and the employee expenses. This was through the evaluation of total deposits, number of transactions and a valuation of tall loans. By use of this model, the study is capable of analyzing the abilities in the institutions, which make them capable of efficient operation (Henderson & Hainsworth, 2007). The relationship between input and output in financial institutions come from the interest and operating costs with principle outputs coming from non-interest income, interest income, loans, and deposits from principle outputs (Berger and Humphrey, 1991).

For the probability efficiency model, there will be an examination of profitability and revenue efficiency by use of two outputs and three inputs (Bos et al., 2005; Ozkan-Gunay and Tektas, 2006). These inputs comprise employees’ expenses, interest expenses and any other operational expenses. The outputs will be non-interest revenue and interest revenues. The financial ratio analysis is the third method the study will use. It will be the comparison of financial ratio analysis and DEA results made up of employees’ salaries, operating incomes and benefit tom interest expenses, and operating expenses (Hassan Al-Tamimi, & Jellali, 2013). The procedure for running conducting the study will start by running the DEA model of the financial institutions separately for the projection of inefficient institutions against the efficient frontier. This creates virtual units. It then requires a combination of the units run in step one and the testing of the hypothesis to average the efficiency capacities of the financial institutions presented in the second step as equals. Finally, small institutions are combined so the adjustments can eliminate any efficiencies of management as measured by the DEA model (Berger et al., 1997). Therefore, it remains that the DEA model is the best for testing the hypothesis of this study. Its instruments provide the opportunity of answering the research questions focused on determining the factors that affect efficiency in financial institutions in the UAE (Hassan Al-Tamimi, & Jellali, 2013).

This study attempts to carry out an evaluation of the research study’s hypothesis. Analysis will be based on an evaluation of performance and efficiency of 18 banks in the year 2011 (Cooper, Zhu, & Seiford, 2011). Data Envelopment Analysis (DEA) will be used to determine the level of efficiency. The method is used to measure production efficiency by comparing the output and input. Input refers to the capital that the bank invests in the business while output is the amount of revenue it obtains. DEA method seeks to determine their efficiency in terms of how much output they produce per given units of output (Ray, 2004). The method also indicates the degree of inefficiencies of various units measured. Based on this method, efficiency is ranked between 0 to 1 or 0 to 100% (Mantri, 2008). In the research, data for inputs and outputs of the various banks are collected. Total input and total output for each bank is computed. Table 1 summarizes the total input and output for the eighteen banks.

From the table 1 , it is not possible to ascertain the efficiency of the banks. A common technique that can be used to compare the performance and efficiency of the various banks is ratio analysis. The next step would require computing ratios of output and input for each bank. The results are shown in the table.

Table 1

Bank Total input Total output Ratio of total output to total input Efficiency
Rak Bank 33,494,677 26,701,692 0.7972 100%
National Bank of Abu Dhabi 440,809,899 275,805,049 0.6257 78.49%
United Arab Bank 20,569,319 12,428,988 0.6042 75.80%
Abu Dhabi Commercial Bank 330,038,797 197,242,108 0.5976 74.97%
Emirates NBD 483,260,789 277,030,000 0.5732 71.91%
First Gulf Bank 291,559,931 162,053,579 0.5558 69.72%
National Bank of Fujairah 27,914,465 15,233,770 0.5457 68.46%
Emirates Islamic Bank 41,615,986 22,380,389 0.5377 67.46%
Abu Dhabi Islamic Bank 140,410,143 74,742,006 0.5323 66.77%
Mashreq Bank 136,553,005 71,361,233 0.5226 65.55%
Invest Bank PSC 20,450,140 10,639,247 0.5203 65.26%
Union National Bank PJSC 158,308,558 82,299,962 0.5199 65.21%
Commercial bank of Dubai 74,373,461 38,613,547 0.5192 65.13%
National Bank of Umm 22,517,841 11,031,039 0.4899 61.45%
Bank of Sharjah PSC. 41,039,354 19,625,088 0.4782 59.99%
Commercial Bank International 22,306,892 10,653,801 0.4776 59.91%
Dubai Islamic Bank 167,587,294 78,728,615 0.4697 58.93%
Sharjah Islamic Bank 33,756,071 15,704,247 0.4652 58.36%

From the ratios computed above, it is evident that the RAK Bank has the highest ratio of total input to total output amounting to 0.7972. The National Bank of Abu Dhabi follows this with a ratio amounting to 0.6257. The bank with the least total output to total input ratio is Sharjah Islamic bank with a ratio amounting to 0.4652. From table 2, it is only possible to compare the ratios of various banks among themselves. It is not possible to ascertain the degree of efficiency or inefficiency of the banks. To obtain the degree of inefficiency, the ratios of total output to the total input of the banks will be compared to the bank with the highest total output to input ratio. The table1 summarizes the ratio of various banks expressed as a percentage of the bank with the highest value that is RAK Bank. The Table 1 shows the relative efficiency of the banks. The DEA approach cannot show absolute efficiencies of the banks. It only gives the relative figures based on the most efficient banks. Table 1 summarizes the rank of the banks based on the relative efficiencies.

In summary, the DEA approach gives an ideal means of estimating the relative efficiency of various units under study. The approach compares the input and output of various units, branches or banks within an organization or an industry. The approach helps an organization or a unit to improve on or do away with areas of inefficiencies.

Competence of RAK Bank

The national bank of Ras al-Khaimah is called RAK Bank. It is a joint public company for stocks that offer joint services to the citizens of the United Arab Emirates. It has about 7.1 billion dollars as the total assets and one of the most competitive banks in Unites Arabs Emirates. The government owns about 53 percent of the shares in the bank. Top officials of the bank come from the prominent Emirate families in the United Arabs Emirate. It provides its services to the corporate bodies, small businesses and retailers (Kettell, 2010). It was classified as the best bank in the United Arabs Emirates in the 2012. From the results discussed in chapter three, it is clear that the bank has high return on the assets. It has a hundred percent output for the input it makes in business.

The bank’s competence can be accounted for various factors within its structure. First, the bank has a wide network within the United Arabs Emirates. It has about thirty three branches in the federation (Laudon & Traver 2009). This enables the bank to reach many clients in its system and get higher returns. The high numbers of customers enable the bank to compete with the other banks favorably. As a result, the output is very high and the income rates are economically viable. In fact, the statistics in chapter three shows that the inputs equal the outputs.

RAK bank uses technology for operations and advertisement. This approach is a competitive strategy that helps them to gain popularity and attract the attention of investors in the company (Laudon & Traver, 2009). It has integrated almost every technology that is useful to the customer in its operation. For example, the bank uses online banking, mobile banking and phone banking. The integration of the various forms of technology enables the bank to serve the clients in an easy manner. Customer’s satisfaction encourages them to carry out transactions in RAK bank. This has been an important pillar to the prosperity of the bank. In addition to technology, it adopts the recent modes of payment and saving. Therefore they use the credit cards, Debit cards and prepaid cards. Moreover, the bank advertises itself through the Facebook, Twitter, YouTube, and Google maps. The wide inclusion of technology helps it to become competitive and solvent than most banks in UAE.

The bank has incorporated various forms of businesses in its services. For example, it offers insurance services to its customers. When the bank offer services that are related to banking they have an advantage over other banks. This is because the client prefers getting the services simultaneously into funding for the services in a separate place (Kenny, 2009). This is the principal of diversification. The principle asserts that a diversified business is self insured. It makes a self insurance against low business periods and maintain it solvency.

Another crucial source of its competence is the marketing approach they use. They assert that the advertising messages should follow the four Cs rule. The rule asserts that the messages should confident, combative, clear and cheeky. It advertises itself by maintaining a firm economic stand during economic downturns and depression (Kenny, 2009). This stand induces the clients’ confidence and encourages investment. In its advertising structure, it uses prominent products and events to convince people to use their services. For example, the bank encourages clients to buy jewelry during valentine using the credit card. This captures the interest of the clients and promotes business (Laudon & Traver, 2009). The banks participate in social events that help it to advertise itself. The events include environmental initiatives, providing educational support to the citizens and other events. This approach helps in creating a good reputation in the community (Kettell, 2010).


In reference to the objectives of this research, it should address various factors of banks’ efficiency. It seeks to understand the main variables that affect the efficiency of the banking systems. It, also, researches on the effect that the factors have on the operation and efficiency of the banking systems. In addition, it gives the macroeconomic effects of the factors. The research should show the results from the field after data collection. The result will give the outcomes of the data collection forming a basis of recommendation and solutions.

In the first case, we seek to present the main variables of inefficiency in the United Arab Emirates. Khalid (2010) managed to assess the efficiency of financial institutions and display a credible mean efficacy of 86.17% and 93.9%. Apparently, this research has identified the variables of inefficiency to include migration of people from foreign countries into the UAE, technological advancement, low deposits, high loans, government misconduct, global crisis, competition by the foreign investors, and creation of global trade associations. These variables have affected the banking system of the UAE. They have led to the tragic economic crisis in the commercial banks. As a result, they form the core players of national economic degradation. However, it is important to understand that each of the variables has different effects. The effects change from one emirate into another. For example, the Dubai has been largely affected by immigration of people from their native countries. Immigration, therefore, has a bigger impact in Dubai than the rest of the emirate that make the United Arab Emirates. However, the effects that the emirates incur at individual level affect the economy of the federation as a whole.

It is mentioned that the variables have diverse effects on the banking system. This part will, therefore, discuss the variables separately. First, immigration is an important factor that affects efficiency and productivity of the banking system in United Arab Emirates. About six million people are from the foreign countries while one and a half are natives. This population imbalance has caused a great inefficiency in the banking system that has led to low productivity (Laudon and Traver, 2009). The foreigners tend to remit funds to their mother countries rather than depositing it in the UAE banks. In most cases the foreigners come from developing countries. Therefore, the value of money within the mother country is relatively lower than that of UAE. This implies that the foreigners send money to their mother countries helping their family members and friends. This behavior has led to the loss of revenue and profit to the commercial banks. If the banks held the money they would invest in businesses that would bring more revenue within the federation. In accordance to the statistics of Laudon and Traver (2009), six million people send 35 percent of their earnings to their mother countries. The two authors identified the influences on the banking system leading to lower profitability.

The banks, also, expressed concern of investments by the citizens. They argue that the large number of foreigners in the federation has led to lower investment in the federation. The banking systems lose the deposits and transactions that the citizens would carry out if they invested in the federation. At the same time, the banks have fewer people investing in their shares and bond. This condition implies that the banks tap little of the generated revenue for investment. The banks operate in deficit and have low capital at their disposal. This affects their investment ability and hence inefficiency and unprofitability. According to Laudon and Traver (2009), foreigners are at the core of inefficiency that affects the banking system of United Arab Emirates.

In addition, foreigners have brought up a political crisis that has led to economic inefficiency in the federation (Enur & Arzu, 2006). The government of the United Arab Emirates has denied the foreigner their rights. They are not granted a right to citizenship through naturalization. This implies that the citizens live in the federation illegally. The government’s actions set fear of investment and depositing money in the internal banks. This is because they do not have the right to reclaim money during a loss. This has led to low deposits and investments in the internal banks. On the same issue, denying the right of citizenship results to non patriotism. As a result, workers are employed to engage in malpractices within the banking industries. Cases on lack of confidentiality have been experienced in the past. Therefore, foreigners have led to the inefficiency and unprofitability of the banking system in United Arab Emirates (Enur & Arzu, 2006)

According to Kettell (2010) the government misconduct is another variable of banking inefficiency. Kettell identified that the government has delayed the payments of debts in various sectors of the economy. Commercial bank in the federation is not an exception to this effect (Kettell (2010).

The government takes loans from the commercial banks and delays the payment. This has been a major drawback to the efficiency of the banking system. It delays the schedule of the banks and inconveniences the budget of most commercial banks. For example, the onset of Dubai’s financial crisis which was experienced in the year 2007-2010 was characterized by heavy government debts to the bank. Some of the banks lay off workers owing to insufficient funds to cater for their salaries (Hossein & Lamia, 2010). As a result, the banks offered poor services to their customers and caused dissatisfaction to their clients. This condition led to massive inefficiency for the three years and low profitability. In the period of financial crisis, the debts led to a tragic fall in the stocks. The indices of European stocks fell to about three percent. The stocks of Asia dropped to two percent from the 27 November 2009 (Kettell, 2010). The estimate debt by the government entities had raised fears that would trigger systemic failure. At this point the Moody’s services downgraded the government for having debts in most of the commercial banks within the country. The investors, therefore, refrained from investing in Dubai until the settlement of unpaid debts. In fact, the Abu Dhabi authority had intervened in the underwriting of various debts that Dubai owed its commercial banks (Kettell, 2010). This was done in a bid to raise the economic efficiency and the profitability of the banks once more. The government, also, engaged in a hectic debt deal with the commercial banks. They agreed to form a new structure that reduced her debt worth $23.5bn to $14.4bn (Kettell, 2010). A deal was agreed with the other banks that were not involved in the debt deals initiating national concern. In light of the crisis, the debts have affected the banks tragically and cause inefficiency. This raises concerns that should be addressed with immediate effect and due diligence.

Through the research, technology was sited to be an important factor of efficiency. Most of the banks in the UAE have digitized their banking system. They have adopted the latest technology that facilitates easy payment and reception of money. The banks have implemented e-banking, Automated Teller Machines and other technological systems of operations (Laudon & Traver, 2009). All the banks within the federation have kept to the tone of technology. Although it has many advantages to the banking system, it is an important factor of inefficiency. It causes inefficiency in various ways and result to tragic unprofitability than the manual systems. Firstly, technological failure in the digital banking system is a major source of inefficiency. Commercial banks incur technical failure from time to time. When the technical failure occurs it destabilizes business and forms a basis of inefficiency to the clients. For example, a technical failure of the Automated Teller Machines causes great inconvenience to the clients. Most customers do not keep cash in their pockets or home banks. Instead, they rely on the Automated Teller Machines while they do business. This implies that the technical failure causes great financial loss to the clients and the federation. The technical failure might take place for a short period of time or a long period. When a system fails for long, the bank causes a nationwide loss that would lead to irrecoverable financial system. The bank managers from United Arab Emirates, also, concede that maintenance of the digital system is a little bit hectic. They use a lot of fund to revive the system when they fail (Laudon & Traver, 2009). This results to inefficiency and financial loss within the system of the banks. If the systems are not handled in the right way, they might discourage the customers from subscribing to the banks. The loss of customers is might lead to the closure of a bank.

Various management personnel brought up the issue of updating the system. Laudon & Traver (2009) argued that technology is growing at a very fast rate in the modern world. Technologists are discovering new devices every day. The new devices come with better features than the previous ones. They are designed to achieve speed and efficiency. This implies that the banks have to update their systems every time. In the process of updating the systems, they close down the services that are offered through the devices being updated. This creates inconvenience to the customers and considers the systems as being inefficient. In this light, updating of the system, also, raise a new challenge to the banks in terms of efficiency. When they update he systems, the employees take time to learn and understand how to use the new technology. This is a major cause of inefficiency to the commercial banks as a whole. On the other hand, the customers have to adjust and learn the operation of the new technology that has been applied in the system. For example, if the commercial bank decides to update the ATM menu they end up confusing the customers. This discourages customers and makes them to refrain from using the digital systems. As a result, they use a manual system that operates at a slow speed leading to congestion. Consequently, the banks experience additional inefficiency within its system. Another risk factor that causes inefficiency in the banking systems of United Arab Emirates is a cyber attack (Laudon & Traver, 2009). The bank officials concede that cyber attacks and cases of hacking have led to great inefficiency and loss to their commercial banks. They suggest that the hackers carry out tragic actions that paralyze the operation of the banks. They interrupt he normal operations of the system when they are trying to mine confidential data from the system. In some cases they destroy the systems using Trojans and viruses. The viruses slow down the systems causing congestion in the institutions affected. These viruses, also, lead to loss of data causing a lot of inefficiency in the bank system. In some cases, the hackers manage to manage to steal money from the banks and get away with rump sums of money. Consequently, the banks undergo financial loss hence unprofitability. From the research, the bank personnel revealed that 21 percent of their income is lost through cyber attacks. However, they do not publicize these cases. They refrain from publicizing the cases to avoid a low confidence of the customers. However, the investment firms in the federation spell out these cases to the public. When the firms publicize the cases of cyber attack they cause loss of customers from the affected banks (Laudon & Traver, 2009). This leads to unprofitability of the system and loss economic solvency. In relation to technology, the customers show resistance to use of technology. The illiterate citizens tend to deviate from using technology. This resistance disrupts the operations of the banks. The personnel argue that the clients who resist the use of technological devices need the employees to serve them manually. This is a source of inefficiency and unprofitability.

The ratio of deposit and loans is a factor that has caused tremendous challenge to the efficiency of banking systems in the United Arabs Emirate (Forsund & Hjalmarsson, 1974). Most of the banks get low deposits and give a lot of loans to their clients. This condition is caused by the high population of foreigners that was discussed in a previous chapter. This implies that the bank has insufficient funds to invest and sustain operations. The condition develops continuous challenges to the system. First, the deposit interest reduces and the lending power decreases. Therefore, the returns that they obtain from the loans lower while their liabilities go high. For example, the Abu Dhabi’s National Bank showed decline from 2.4 percent to 2.16 percent. Lower lending rates force the banks to keep temporary instruments that act like depository certificates. The deposits earn very little interest affecting the margins between income and expenditure. The imbalance sets the banks at a risk of losing clients and becoming insolvent.

The commercial banks of the United Arabs Emirates experience a lot of competition from the foreign investors. Foreign investors take advantage of the expatriates in the federation. The previous chapter states that the expatriates take 93 percent of the population of the United Arabs Emirates. The foreign countries urge and encourage their citizens living in UAE to invest in their mother countries. Since the foreigners are denied the right of citizenship they, therefore, invest in the banks that exist in the mother countries. Therefore, the foreign investors compete favorably against the banks in United Arab Emirates. In addition, the foreigners make investments plants in their mother countries. These investments compete for the same capital base with the UAE bank.

Global crisis is a variable of inefficiency to the banking system of United Arabs Emirates. Bank officials argue that UAE cannot exist independently. It is affected by other factors that impact the world. United Arab Emirates incur an economic slowdown in the face of global crisis. The governor of the central bank of UAE expressed an opinion suggesting the reduction of exposure to European debts would affect the economy of the federation. He said that European countries, Asia and USA create the major market of oil from UAE (Kettell, 2010). When the countries adopt a recession their economy, they lower their business activities and expenditure on oil. As a result, UAE exports less oil than they export in normal economic conditions in the three contents. The banks lack deposits and lending power. This condition leads to an inefficient bank system and unprofitability.

Global trade associations have a great economic impact on the banking system of the United Arabs Emirates. The global trade associations provide common laws that the banks should follow. They set up liquidity laws that apply to all banks that form the association. However, the banks have different economic capabilities and financial levels. Therefore, the associations form an unfair platform during the operation. This condition affects the efficiency of the bank system.

The bank personnel revealed that the bank financial inefficiencies affect the national economy. Firstly, the incapability of the banks to offer loans to the institutions is a menace to the development of the national economy. This is because the people lack money for investments. This implies that the level of revenue generated by the citizens is very low. The condition of low investment leads to a weakened economy. In this light, if the citizens do not deposit money to the banks in the country might incur and experience inflation. The research shows that banks have control of inflation by regulating deposits and loans. An efficient banking system cannot control the inflation hence affecting the economic status of the country. Inefficiency that is caused by cyber attacks and hackers lead to loss of funds from the country. Some of the funds that are stolen through hacking belong to the arms of government (Kettell, 2010). When the government loose funds, the economic roles of the government are deterred. For example, a fund that is directed to the security of the country would cause impairment security in the country (Kettell, 2010). Lack of security would lead to unfavorable conditions that hinder economic development. The efficiency of the banks determines the protection of national fund against loss.

In efficient banking systems might cause loss of funds through technical failure. For example, technical failure that occurs on the ATMs can cause a tragic loss on the economy. In case of technical failure, people lack money to carry out business transactions. If the machines fail during the weekends the clients are unable to obtain the money over the counter. In fact, the failure of the ATMs for half an hour causes great loss economically. Therefore, this research shows that the inefficiency of the banking system is a major challenge of the federation’s economy. Therefore, banks should put up the necessary systems to avoid the financial losses.



The final objective of this research is to stipulate possible solutions for the problem questions that the research should answer. The recommendation seeks to give the possible remedy to the inefficiency that is experienced in the banking systems of UAE. The research will, also, give the possible solutions to the effects of inefficiency to the national economy. Through the recommendation, the research will become an all-inclusive research that focuses on the problem and provide solutions at the same time.

In the first inefficiency variable, the federation of the UAE has many foreigners than native citizens who invest in their mother country. The research found out that the main challenge is the lack of citizenship to the United Arabs Emirates. The lack of citizenship makes the foreigners to lack patriotism to the country. They, also, have a low attachment to the country. They fear that the government can evict them from the federation. Eviction would lead to the loss of their personal property. Therefore, they choose to invest in a more secure place than the United Arabs Emirates. In addition, the banking systems should discourage the citizens from investing and sending money out of the federation. This can be done by imposing relatively higher charges of sending money outside the country than receiving money from the foreign countries. This will ensure that the citizens find it easier to invest within the United Arab Emirates than investing outside. The banks should lend special loans to the expatriates and encourage them to make investments within the UAE. This would create a spirit of internal investments and hence curb the losses that are incurred through foreign investments. In addition, it will ensure that the foreigners have a sense of belonging that encourage them to invest in the UAE. At the same time, it would eliminate the cases of untrustworthy employees.

The banks should eliminate and reduce technological inefficiencies. This research found out that technical failure lead to massive loss of funds while the banks stop business due to technical hitches. Therefore, they should have competitive technicians who maintain the machines and devices. This will ensure that minimal failure is experienced at any given time. The specialists should aim at working on the failure as soon as they happen. This ensures that the system does not break down for long to hinder business activities (Burgess, 2002). In addition, they should come up with means of serving the clients at the times of failure. For example, they should operate over the counter immediately a failure occurs. The alternative service aims at mitigating the loss that the economy undergoes. This will ensure that there is a progressive increase in the income that the citizens bring to the country. Moreover, the banks should ensure that they use secure means of technology avoiding cyber attacks. Prevention of cyber attacks would help the banks to eliminate and fight data mining. Therefore, the security measures prevent the loss of money that causes losses. In this light, they should invest in very strong devices that make authentication of employees and clients confidential. This will act as an important and a crucial step in curbing the rising tides of hackers. On the same account of technology, the banks should use devices that are user friendly. The devices should be easy to use for almost every client or employees. This will ensure that most clients use the digital system rather than the manual service. As a result, the clients save a lot of time that they would use in other businesses that support the economy of the federation. In the same case, they should make brochures that help clients to understand the use of technological gadgets. The community education about the bank services is a crucial pillar of efficiency and profitability. When updating the machines and devices that are used by the clients, the bank should give a notice to the clients. This should take place before they start the process of updating. The notifications should be given ample time. The notifications will ensure that the clients make the necessary transactions for the time that the devices will be in maintenance. This role is carried out by the public relations department and the management to cater for the welfare of the clients and the national economy. Therefore, solving technological inefficiencies in accordance with the above recommendations would improve efficiency and increase profitability.

Thirdly, loans have tremendous impacts on the efficiency of the banking system in the UAE (Enur & Arzu, 2006). As a result, the commercial banks should develop the ways in which they avoid losses through the loan. They should take insurance with competent insurers from the federation or abroad. The insurance company insures them against unpaid loans and such risk factors. They should aim at balancing the lending and depositing rates. This ensures that the income they get from the income they get balances with their liabilities of deposit. However, the banks are not the only player in the issues of lending. We found out that the government takes a huge amount of loan and delays to pay back the amount they borrowed. This research recommends that the government should act with due diligence in the interest of the economy. It should not delay the repayment of loans. This is because the citizens and other investors would need the same fund to make private investments. An attempt to delay the loan payment set the commercial banks on a level that disable them from giving loans to other people. Furthermore, it induces the banks to operate in deficiency resulting in inefficiency and unprofitability.

Banks should enter into trade associations that will benefit them economically. They should refrain from the associations that have put rules which they cannot maintain and respect. For example, they should consider the liquidity policy of the association. An association that sets high liquidity levels might hinder re-investment. As a result, upcoming banks might develop slowly or collapse due to high liquidity that does not earn income to the commercial banks that are involved in the associations. They should consider the profitability of the banks that form the association. Associating with banks that have a poor economic strategy might lead to the collapsing of a bank.

Banks in the UAE should protect their business from foreign investors. From this research, it is clear that the foreign investors have an upper and in the economy of Unite Arabs Emirates (Kettell, 2010). They have the advantage of population distribution where the expatriates are more than the emirates. Therefore, the banks should tap the fund and the income from the expatriates in more tactical strategies than the ones they use today. For example, they might have a strategy that aims at lending money to the expatriate to encourage them to deposit and operate within their banks. In addition, they should identify and implement special services that most banks are not offering in the mother country. This strategy would encourage the non foreigners to stop remitting funds to their mother countries for investment. Also, they should advise the government on the importance of nationalizing the foreigner. They should approach the issue from an economic perspective. This would help the government to consider the foreigners as being assets rather than liabilities to the country. This can achieve and attain more economic solvency than the present situation that exist in the federation.

Global crisis is a variable of inefficiency and economic unprofitability of the United the Arabs Emirates. The economic downturn of various countries might affect the economy of the UAE. Therefore, the federation should expand its markets and have a wider range of market (Terterov, 2006). This would enable the UAE to survive the economic downturn of other countries. It would help them to have a full time market for their oil. In addition, the UAE should diversify on its economy. Diversification is a tool for economic sustainability. It ensures that the economy of the federation operates on various platforms. When one of the platforms fails, the economy can run through the support of the other arms of the economy.


The research that has been presented in this paper is an all-inclusive research that focuses on a sufficient sample size of eighteen banks. It has focused on the gap that has existed in research. This gap has been closed by considering the banks of UAE instead of considering the foreign countries that experience different economic conditions in their respective countries. It has used satisfactory methodologies that aid in collecting accurate and reliable data for analysis. In addition, it has provided the results from the field and done the analysis that is required in making recommendations. Lastly, this Thesis has presented valuable an implementable solution to the efficiency problems that the United Arab Emirates undergo. Therefore, it is a crucial and a worthy research for this thesis.


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