Academic journal article Journal of Financial Management & Analysis

Performance of the Banking Sector in Saudi Arabia

Academic journal article Journal of Financial Management & Analysis

Performance of the Banking Sector in Saudi Arabia

Article excerpt

Introduction

Within the overall objectives of the commercial banks one can say that commercial banks look forward to achieving wealth maximization of their owners. However achieving such an objective is bound by certain constraints reflected in the liquidity and safety required by the depositors. Wealth maximization as an objective is in contradiction with liquidity and safety because the concentration on these factors (liquidity and safety) would inversely influence wealth maximization. Therefore, policy formulation concerning wealth maximization is influenced by the objectives formulated which in turn is complicated by the changing and competitive environment in which the commercial banks operate. Such an environment induces commercial banks to embark on implementing changes rather than reacting to it. Therefore, commercial banks must adopt new business methods if they are to survive and prosper. They need to bring strategic planning, an excellent customer service quality into their organization, together with more effective human resources management.

Commercial banks in Saudi Arabia are the most active sector in the economy and they play an active and dynamic role in the economic development. Therefore, attention given to commercial banks' activities is highly important knowing that their success would with no doubt represent the success of the national economy. Within this context stated above the current study addresses and aims at measuring the performance and the market power of Saudi banking sector. In specific term the objective of this study is to test the efficient structure hypothesis and the relationship between different concepts of profitability and firms market shares in the banking sector.

Prelude

Commercial banks performance is determined by the market structure such as perfect competition, monopoly, in which they operate. Perfect competition is known to be an idealistic market structure that secures socially just and efficient outcomes. On the other end, pure monopoly (one seller) causes inefficiency of resources, inequality of income distribution, and net social welfare loss. Therefore, monopoly is viewed by societies as an evil situation that deserves government intervention for correction through different schemes of regulation. In reality, here is a spectrum of market structures that contains a variety of structures ranging from perfect competition to pure monopoly. In many cases decision makers face a gray area of market structures where it is difficult to determine the deviation from the competitive norm, and to which extent the situation may justify regulatory action by the movement.

One important and widely used criterion for judging monopoly power is market concentration ratios. The structure - performance (S.P) and the Efficient-Structure (E.S.) are the major hypotheses well known in the literature of industrial economics which address factors determining market power. According to S.P. hypothesis, market power measured by profitability depends on market concentration. To the contrary, the E.S. hypothesis views profitability as a result of firms shares which reflect firms relative efficiency.

Market Power and Concentration

Previous studies have shown that the relationship between concentration and profitability is mostly inconclusive, non stable over time, and or of poor predictive ability in the sense that a small proportion of variation in profitability can be explained by variation in market concentration. High concentration ratios mean that the greater proportion of total.sales is under the control of a small number of participant firms in the market. Under such circumstances, both the incentives and the opportunity exists for this group of firms to collude or to engage in some monopolistic practices to make abnormal (above the competitive) profit causing the society to bear the above-mentioned monopolistic social welfare burdens. In general, concentration ratios reflect both absolute number of firms and their size distribution, and are fairly available and most widely used of all measures of market power. …

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