Abstract
Several factors influence the operational efficiency of UAE Financial Institutions. This paper has adopted the factor analysis approach to bring out efficiency factors in the UAE financial institutions sector. For easy and accurate analysis, all financial institutions including banks and other public institutions will be sampled. However, selection will be limited to manageable data. In the Middle East region, banks are the major financial institutions. We will develop random variables for our industrial analysis (Comrey, 2005).
Our result aims at finding the influences of organizational factors, such as a financial institution characteristic, as an indicator of efficiency measures. Our research findings will not only be limited to banks’ usage in the UAE but also include adjustments in various other financial institutions in the region (Mazhar, 2003).
Introduction
Financial institutions are vital in creating monetary flow through deposits and lending. Economic stability relies heavily on banks’ effectiveness and efficiency in monetary transactions. Control of cash flow is majorly done under national commercial banks. As a result, most economies, including the eastern economies, fight hard to ensure that their financial institutions are stable. The UAE lies in a region with varied economy. The countries in the region have a common cultural setup, economical activities and religion. Most of these states heavily depend on oil trading across the world.
The UAE is among the countries with very fast-growing financial institutions. Enabling governmental regulations, financial products’ diversity, high demand for Islamic products, and high productivity in the region has attracted many investors in the region. Since 1990, the financial industry has faced changes in technology, deregulation impacts, and globalization. As a result, competition in the industry has increased. Consequently, small financial institutions have been absorbed by larger organizations. This research is aimed at identifying efficiency factors influencing the operations of these financial institutions.
Literature Review
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 studying the developing world of Africa and the Middle East. Sun & Kobeissi (2010) carried out research to determine banks’ performance and ownership in North Africa and Middle East. Data was collected from 221 regional banks. The data was then analyzed to check impacts on structural adjustments and performance in the banks. Their work showed that private banks performed better than public institutions did. Consequently, the study indicated that foreign banks had better performance than internal institutions.
El Moussawi (2009) compared the efficiency of the banks with domestic ownership and those with foreign ownership in Lebanon from 1996 to 2005. In the study, the calculation was based on DEA and applied to calculate banks’ cost-effectiveness and annual resource usage. The results showed that very minimal variation occurred. However, the efficiency measures showed high performance on foreign institutions. From the study, he concluded that efficiency was separately determined by bank ownership (Mazhar, 2003).
A study was carried out in Oman by application of financial ratios. A simple regression technique was applied to compute the findings. During the study, five Omani commercial banks with twenty branches were used. The result of the study showed that the higher the banks’ total assets, credits and capital were, the higher the banks’ profitability occurred.
The study of crises in Japan is another research of factors influencing banks’ successful operations. Huge qualitative and quantitative data were collected for the research. Quantitative data suggested that banks had been influenced by household, 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 governmental policies had a lot of impact on the development banking sectors (Sohel Azad, 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 did. Lastly, Al-Tamimi (2010) carried out a 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 affected their performances. Number of branches and their costs impacted on performances of Islamic banks (Sun & Kobeissi, 2010).
Research Methodology
Most previous studies combined several countries and focused on either external or internal factors. The studies mainly center on the banks; we take all financial institutions including banks and consequent borrowing and lending organizations. The study will focus on both internal and external factors, i.e., GDP and inflation, plus ROE and ROA. Apart from these, the study will also incorporate religious belief as an efficiency factor. The paper will apply the factor analysis method for the analysis. This method is vital in the analysis of observable and unobservable features. PCA tool becomes vital in factors extraction. Efficiency indicators will be developed and used in computations.
The following steps will be applied:
- We will generate a correlation of all the variables. Identification of unrelated variables will be simple and unrelated to the variables from the matrix.
- We will develop several factors that will validate our findings and calculations.
- We will carry out factor rotation for all factors to have zero loading.
- The scores for each factor will then be computed.
Sources of the Research Data
We will apply questionnaires. The questionnaires will have two parts: the first one will show demographic details while the second will be made of the variable questions. The number of questions will depend on the available variables. We will develop about two hundred questionnaires for our sample group. The target population will be people working in financial fields or institutional teachers. For accurate analysis, all financial institutions, including banks and other public institutions, will be sampled. A random sampling technique will be applied among the group while distributing the data. Consequently, we will randomly sample the institutions that will be studied. Data will be recorded and analyzed based on our methodology.
Conclusion
The paper will provide efficiency factors in UAE financial institutions. As per PCA, we will extract the following six factors from our variables: characteristics of the financial institutions, competition environment, economic indicators, legal and regulatory environment, national risks, and other factors. Our result aims at finding the influences of organizational factors like a financial institution characteristic, as an indicator of efficiency. Our research will not only be applied by banks but will also be used for adjustments of various financial institutions in the region. We believe that from our results, we will demonstrate that all the factors above influence financial institutions’ operational efficiencies. Our findings consequently will direct players in the industry.
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.
Comrey, A. (2005). A first course in factor analysis. Hillsdale, New Jersey: Erlbaum.
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
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. 52( 3), 287-323.