Economic hardships witnessed across the world in the last decade have spurred a series of changes in several financial institutions globally (Kota & Kukunuru, 2011). Emanating from the fact that financial institutions have experienced remarkable changes in their practices since the advent of the serious global financial crisis of 2008/2009, Gulf Cooperation Council (GCC) countries have made fundamental changes to their financial systems (Yaseen, 2012).
Although the financial crunches across the globe came with ferocious repercussions to many nations, with some up to date struggling to adjust to serious financial problems, countries within the United Arab Emirates (UAE) have a different conception (Mehta, 2012a). In the UAE, “the primary task of the banking system has been to finance the government needs, public enterprises, and priority sectors through the mandatory holding of treasury bills and governmental bonds” (Yaseen, 2012, p. 153). During financial crisis, banks in the UAE implemented some reforms that included integrating bond markets in the banking systems, that until today, its contribution is eminent, but less understood.
Background of the Study
Trucial States or the UAE countries were initially a simple subsistence economy as they largely depended on agriculture, trade in pearls, and nomadic husbandry, but since the discovery of oil extraction and exports, much has changed (Pecchenino, 1992; Shihab, 2000). Before the emergence of the financial crisis in these nations, records from the year 2005-2007 reveal that the banking sector of the UAE had experienced an increase in the lending rates up to 30% (Mehta, 2012b).
However, financial institutions during that juncture faced serious banking challenges as bank deposits grew at a slower pace than anticipated, and there was need to devise new banking policies (Hashmi, 2007). Since the banking system of the UAE during the financial crisis faced low profitability and hampered growth due to decrease in wholesale funding, pressured investment securities, and plummeted local real estate markets, banking practices in UAE needed to change (Ellaboudy, 2010). Mehta (2012b) postulates that the banking system of UAE reduced the lending rates and resorted to portfolio investment that comprised of bond investment.
Being on the campaign towards financial globalization and a country considered as an Emerging Market Economy (EME) coupled with the impact of oil and gas export on its financial system, the bond market and equity investment of the UAE have soared (Das, 2010). Apart from dominating the practices of financial institutions within the GCC zone, the UAE is manipulating the international bond market investment, with its bank profitability and growth advancing to great developments (Schizas, 2012). Rising from being the majority group initially considered as substantial net debtors from the 1990s, with a sizeable borrowing from the US banks, the UAE bank system reformed and became net creditors during the 2000s (Das, 2010). The bond market investment and the security stock exchange market have grown exponentially and became significant investment practice for the Emirati financial institutions. Market growth in the bonds and securities aimed towards generating huge interests of the banking through lending potential firms in the UAE have generated substantial economic advancements.
Currently, the UAE secondary market has all the needed concepts such as professional financial institution, stable political system, and open economic market. Muted performance and high volatility in most of the equity markets in the Europe and the United States have lowered investors risk morale to the banks (Samuelson, 1995). This seems to have given the UAE a substantial advantage to its financial globalization approach (Nicolau, 2010).
To the advantage of financial institutions of the UAE, with oil export as an imperative financial asset, investors even from Europe and US have sought refuge in bond investment from governments with stable creditworthiness including the GCC (Mackenzie & Rodrigues, 2012). Enormous exposure to foreign financial markets, including those from the US and Europe that have brought in large private flows to the UAE banking system, have influenced the growth of financial institutions and the domestic economy of the UAE (Haque, Arun, & Kirkpatrick, 2010). Investing in privatized international and slightly some domestic bond markets in the UAE have instigated a substantial development in the Emirati financial institutions and its economy.
High dependence of GCC countries on oil and gas revenue is something research cannot undermine as it has a direct influence on the bond and security market investment within the UAE (Ellaboudy, 2010). Oil and gas resources, regarded as safe financial assets, make the UAE have a large sovereign wealth and funding position (creditworthiness) and less dependent on government bonds and securities (Nicolau, 2010). Moreover, neither the local authorities nor the federal authorities of the UAE borrow money for fiscal financing purposes and domestic uses, and hence, foreign private bond markets are a major priority for the UAE (Saunders & Cornett, 2007).
International reports concerning the UAE reveal that the issuance of public or government bonds as instruments of fiscal policy is not a major practice of financial institution as the private bond market greatly helps the UAE countries to face economic crises (Cuzovic, 2012). As Das (2010) notes that capitalization of the private and corporate bond markets, instead of investing in public, government bond markets are slowly becoming a common practice in financial institutions of most of the UAE countries.
Whilst the government bonds are less active than the domestic and foreign private bonds in most of the UAE countries, the impact of bond financial business as a fiscal policy in these nations has a positive influence on their economy (Shihab, 2000). Both government bonds and private bonds practiced by financial institutions of a nation assist in boosting the economy of the nation concerned. According to Schizas (2012), bonds strengthen financial systems of the nations, an aspect that helps in promoting investor confidence, encourage more active participation in the financial markets, and somewhat helps in GDP growth, and hence, benefiting the UAE’s domestic economy.
Nicolau (2010, p. 28) postulates that, “the bond market generally attracts investors who are looking for a steady stream of income with reasonable, but low risks.” With low risks associated with bonds, Nicolau (2010) believes that a vibrant government bond market in the UAE is probably the most imperative, primary source of fiscal revenue that would help in the government’s budget and long-term planning.
Before the financial crisis in 2008, the two main sources of raising funds in the UAE were from the Initial Public Offering (IPO) or loans from banks with high interest rate payments. In the UAE, this has been affecting the national economy, as the governments have to struggle with financial difficulties and sometimes lose important public resources due to incessant debts (Darrat, Abosedra, & Aly, 2005). Bond as capital market investment is more advantageous to both the investors and the government than the loans, which normally come with high risks. Within the financial markets, bonds work well with the investors who are seeking a stable and secure source of income (Cuzovic, 2012). More interesting is that the recent advancements in the UAE seem to generate an important impact on their financial globalization process. Hashmi (2007) asserts that, joining the World Trade Organization (WTO) and the creation of the Dubai International Financial Corporation (DIFC) in the UAE banking sector are some of the interesting developments that may boost bond markets.
As Dubai is nearly becoming a powerful economy, Ahmed (2000) believes there is a need for a new capitalism approach. Recent Dubai capital market research indicates a rising bond market in the UAE, with a continuum of investors interested in financial markets across the Middle East countries (Mackenzie & Rodrigues, 2012; Goyal, & Joshi, 2012). Currently, the UAE secondary market has all the needed concepts such as professional financial institution, stable political system, and an open economic market (Connolly, Stivers, & Sun, 2005). The UAE has active primary and secondary markets for common stocks, unlike the past when rising bonds remained rarely issued and it was for selected groups of government entities or individuals. From a recent report from investigations on Emirates NBD Bank and NASDAQ Dubai, bond markets are becoming a boom business. Lately, the recent government bond issued (worth $750 million US dollar) by the NASDAQ Dubai ranks second largest public bond ever issued, and Emirates NBD listed it as the second best in the annual securities exchange (NASDAQ Dubai, 2013). This augments the total worth of the traditional bonds from NASDAQ Dubai to approximately $5.75 billion.
The Research Inquiry or Problem
Financial markets act as an important facet of fiscal resource of the government as they support budgetary and government long-range planning needs. Although financial markets have much significance to the growth of domestic economy, governments trading on risky fiscal revenues normally threaten the national economy (Darrat, Aly, & Abosedra, 2005). Despite substantial evidence of imperative government bonds from developed economies, the emerging economies, including countries within the UAE are failing to acknowledge their impact.
Research has established that bond markets in the UAE are still in their emergent stage regardless of having more than a decade in their progressiveness (Haque, Arun, & Kirkpatrick, 2010). Being a potential creditor across the Middle East, the UAE has continuously failed to acknowledge the full capacity of the bond market in improving financial institutions and enhancing the growth of its domestic markets. Despite an outstanding research and evidence on the importance of financial bond market from developed economies, including the US and other nations of the western hemisphere, bond markets in the UAE have remained underutilized.
Building a strong economy begins with strengthening the financial systems of the nation and since the UAE is still an emerging economy with several capitalist opportunities, the demand for bond markets should remain unrealized (Ibrahim & Alqaydi, 2013). Emerging Market Economies including the UAE are increasingly becoming favorite investment destinations for the western nations and this might be a great opportunity for building a strong economy of the UAE (Ibrahim & Alqaydi, 2013).
The overdependence on the current stable oil reserves for fiscal revenue may likely put the UAE at stake, as several tensions around the world are resulting from such revenues (Moosa, 2010). Diversification is an important strategy of creating a portfolio to invest. It is known among financial experts that the more a nation divides investments among different types of financial avenues, the less the risk and the more the return (Kota & Kukunuru, 2011). Fundamentally, this research seeks to examine the importance of financial bonds market to the Emirati financial institutions and the UAE economy.
Aim and Research Questions
The main intent or purpose of the proposed capstone project is to examine the imperativeness of bond markets to the financial institutions of the UAE and its national economy. As a primary research, all the arguments will hinge upon the collected data from NASDAQ Dubai and the central bank of the UAE, being the areas of study. In an attempt to understand the significance of financial bond markets for the Emirati financial institutions and the UAE economy in general, the underway study will use the following research questions in examining the stated issue.
- As per the current situation, what is the current situation of bond markets in the UAE?
- What is the main imperative of issuing bonds and investing in bond markets by the Emirati financial institutions?
- What are the significance of financial bond markets and the practice of the issuance of bonds to the national economy?
The Proposed Research Methodology
Research methodology implies all the processes involved in undertaking a research, with the focal aspects being between data collection, data analysis, and discussion of results (Crabtree & Miller, 1999). The entire research methodology of the proposed study will entail a qualitative survey methodology that seems more feasible in evaluating the existing problem from the participants. Qualitative research provides researchers with an opportunity to explore their interest in understanding the meaning that people have constructed or even how they view their world and the real experiences of the world (Kitzinger, 1994).
Qualitative researchers have a unique opportunity of studying issues in their natural phenomenon. “It is qualitative research and understandings that provide scholars with the insights to conceptualize issues and problems differently, thereby providing the foundation and building blocks for theoretical advancements, refinements, and even initiations” (Tewksbury, 2009, p. 56). Examining the stated problem requires more participation from the participants and qualitative research is suitable in this case as it locates the main observer of the real world.
Data Sources and Data Types
Secondary Research Data
Secondary data refers to information gathered from existing research publications on studies undertaken from various grounds, but carrying similar theme. According to McQuarrie (2005, p. 53), “secondary market research refers to any data gathered for one purpose by one party and then put to a second use by or made to serve the purpose of a second party.” The study will combine both secondary and primary data, and the main sources of secondary data will be journals, books, and other government reports and publications that will enrich the intended research with a powerful background. With different commentary obtained from existing research publications, the study will manage to gain a comprehensive insight into the research problem examined (Kothari, 2004). The study will use search engines including Google, to access reliable journal, books, and other relevant publications. Secondary data will help in consultations, setting objectives, and assessing theories and related arguments in the existing empirical evidences.
Primary Research Data
Primary research entails carrying out an investigation on a problem by collecting data from the study participants and analyzing them, which contrast secondary research that focus on already collected and analyzed data. According to Driscoll (2011), it includes first-hand information gathered afresh through primary data collection methodologies, including direct observations, surveys, and even interviews. Primary data enrich secondary information and even establish facts about the existing theories (Miller & Crabtree, 1999). For the purpose of the proposed research, primary data will come from direct interviews targeted at participants from the NASDAQ Dubai and the central bank of the UAE.
The two organizations have the required capacity to provide information pertaining to government financial statistics and important primary data on bond markets from within the UAE. As recommended by Kothari (2006), akin to this proposed research, structured interviews with a set of predetermined questions will aid in collecting the needed primary research information, with the researcher employing highly standardized recording techniques.
Understanding of scientific research principles and the identification of research participants are the most crucial aspect in the process of undertaking primary research (Teddlie & Yu, 2007). The main study participants for the proposed capstone project targeted by this study are the top management officials of the NASDAQ Dubai, which is an international leading bond issuer with great long-term business investment within the Middle East. In addition, comprising the study participants are the top management officials from the central bank of the UAE, who possess a pool of knowledge pertaining the trends in the bond markets right from the historical perspective of the bond markets in the UAE. The intended research targets about 50 top management officials from both organizations, a number that is quite appropriate for this research, and hence, no need to establish a sample size. Using purposive sampling, the study will select individuals who deem appropriate for the study in that they can answer the research questions professionally (Teddlie & Yu, 2007). In this view, the research understands that financial managers have great knowledge on bond markets.
Analysis, Research Results, and Discussion
The surveys will include questions with statements about the inquiry and the research expects that the participants will comprehend and provide their ideas meaningfully. Immediately, after the data collection process is the data analysis in which qualitative data analysis assumes the use of simple analytical approaches, and narrative analysis will be imperative in this study (Crabtree & Miller, 1999). The study will analyze the perceptions of the managers regarding the current state of the bond markets in the UAE, examine the statistical data provided, and examine the judgments and arguments presented by the respective management teams of various organizations.
Content analysis will also aid in analyzing the data provided, as it is imperative to identify how the participants construct the meaning of the ideas regarding the inquiry. The qualitative discussion will involve a comprehensive, detailed discussion of the ideas, facts, opinions, and arguments presented by the participants and observed. The study will report the findings in a qualitative manner, with results presented in argumentative form depending on the conceptions presented by the participants about the research problem.
Proposed Timeframe for the Study
The Capstone Proposal
The entire capstone project may take just about three months for its completion. A week is enough to formulate the capstone project group, which will work mutually towards the completion. Comparatively, identification of the problem to investigate may take a similar duration. The entire process of developing the proposal will probably take approximately two months. In a breakdown, discussing the problem or the inquiry under the investigation with the group members may take roughly two weeks, where consultation with other friends and the supervisor. A week is enough to investigate the possibility of acquiring primary and secondary data, where the researchers will concentrate on identifying reliable books, journals, and government publications to support the background of the study. The capstone groups will use this time to search relevant information from online libraries and other archives available to the researchers. The writing of the proposal will consume about three weeks of secondary data compilation, formulation of objectives, and discussion of the methodology.
Final Capstone Project
The project begins with compilation of the primary data from the identified participants during a three-week period, which includes developing data instruments (interview materials), consulting relevant sources, conferring with the supervisors, and correcting errors in the instruments. Reconnaissance will take place in approximately one week for the participants to familiarize with the study zone and probably seek authorization to conduct the study in an attempt to avoid unethical research practices. Piloting may also occur during this moment to examine the effectiveness of the data instruments. Two weeks will be essential in gathering primary data from the participants, recollecting reliable evidence from the participants, and managing the data. The study will take another two weeks of sorting the data, analyzing the information, interpreting the provided information, discussing the data, concluding, and recommending on the inquiry, before finally presenting the report to the institution for further assessments. A report on the participation of the members of the institutions will finalize the report.
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