Introduction
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). This research aims at identifying factors affecting the efficiency of financial institutions in the UAE.
Objectives
The research objectives include:
- Establishing the major in efficiency variables of banking in the UAE
- To find out how the in efficiency factors affect the financial sector in UAE
- To establish the effects of the financial inefficiencies on the national economy
- 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.
References
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