Academic journal article International Journal of Business and Society

Global Financial Crisis and Productivity Changes of Banks in Uae: A Dea-Mpi Analysis

Academic journal article International Journal of Business and Society

Global Financial Crisis and Productivity Changes of Banks in Uae: A Dea-Mpi Analysis

Article excerpt

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Financial system stability in any country is important for both the overall economic development and the effectiveness of the central bank monetary policy. Over the last two decades, the UAE government has undergone consistent and remarkable transformation from a socialist to a capitalist economy. These changes were introduced mainly to improve the economic efficiency of UAE banking system especially after the global financial crisis. The banking industry in the United Arab Emirates is one of the major, and arguably the most important, industry in the United Arab Emirates after the oil and gas industry. This is mainly due to its role as an intermediary and facilitator for the better allocation of assets in a country that is seen as the regional hub for international finance, a free zone and international trade hub, a leader in the development and sale of real estate mega-developments and centre for a large concentration of net worth individuals with large multibillion dollar conglomerates.

All of these key industries in the United Arab Emirates require the presence of banks in order to allow the right allocation of funds through financing the key projects and industries of the country.

In 2010 the UAE banking sector comprising of some 23 local and 26, the banking sector in the UAE has for quite some time benefitted from being in a very sound and robust position. In the UAE, four types of banks are seen to be operating simultaneously. They are conventional, Islamic and foreign banks. Moreover, some commercial banks have started opening Islamic windows and Islamic units for those clients who do not want to indulge in interest-based transactions. This conviction created an increased demand for Islamic products in the field of financing, and gave birth to a market where only Islamic products are acceptable. Thus, banks working under Islamic windows are established to provide an additional service to Muslim clients or to offer a variety of products for general clientele.

The UAE was the first country in the world to establish an Islamic bank, namely Dubai Islamic Bank, in 1975. Islamic banking is one of the fastest-growing segments in the financial sector globally. Assets of UAE's Islamic banks reached $73.1bn at the end of 2010 according to UAE Central Bank governor. Islamic banks in the UAE target all categories to broaden their reach, through innovative product offerings including Islamic personal finance, Islamic credit cards and Islamic auto finance, Shari'a-complaint mortgages, and a growing range of investment funds.

UAE bank shares were slammed by a bear market amid an epic fall in oil prices, a rise in the US dollar and an exodus of global capital from emerging/frontier markets. The scale of selling on the Dubai Financial Market and the Abu Dhabi Securities Exchange has eerie echoes with the autumn of 2008, when Lehman's failure led to a seizure in the global interbank and wholesale funding markets, a $100 a barrel drop in Brent crude, panic flows into the US dollar and a free fall in Gulf property markets.

The global financial crisis in autumn of 2008 has affected many countries globally and in particular effect UAE economy in general. The UAE made various actions after the crisis to save their economy from any impact may affect their economy. Firstly, UAE banks have vastly boosted their capital cushions since 2008 and Basel Tier one capital for the banking sector is now 16.7 per cent, at least 500 basis points higher than on the eve of Lehman's failure. Secondly, six years of frenetic loan growth had made loan/deposit ratios in UAE banking excessive at 108 per cent in fall 2008. Banking sector leverage has also fallen to 7.6, 100 basis points lower than in 2008. Three, UAE banks have also successfully raised the non-performing loan coverage ratios in the banking system to 113 per cent, far higher than the coverage ratio during the 2008 global credit crisis. …

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