It is imperative to note the importance of banking in an economy. The roles of banks in an economy especially the depositing and lending functions are quite essential. Banks act as the intermediary between lenders and borrowers and this makes them very vital in determining the stability of the economy. Therefore, just like any other region, the Middle East focuses on stabilizing their economy by enhancing a healthy banking system. This paper will be looking at the major factors that influence the overall performance of banks in the Middle East region.
The Middle East region’s banking industry is one of the fastest growing in the world. It is projected that the industry will get even better in the future due to the nature of the business and the working environment. Some of the reasons making the banking industry in the Middle East successful are as follows. Notably, there is less government intervention in the running of the industry. In addition to that, the industry is very well monitored with the numerous regulatory requirements (EI Moussawi, & Awdeh, 2009).
Another advantage in the Middle East region is the low market concentration hence increasing the demand for banking services and reducing competition (Athanasoglou, Brissimis, & Delis, 2005). The banking products offered in the industry are quite diversified which is an added advantage in the region. In addition, the region’s success is favored by the numerous entries of foreign banks in the industry (AL-Tamimi, 2010). A number of structural changes have also influenced the functioning of the industry including globalization, deregulation, and technological changes (Athanasoglou, Brissimis, & Delis, 2005).
There have been a number of researches on commercial bank’s performance but they mainly address a single country (Comfrey & Lee, 1992). In addition, the researchers focus on one of the two, external variables such as inflation and internal variables (Athanasoglou, Brissimis, & Delis, 2005). This research adds another variable that can be considered as religion variable, which entails aspects like religion beliefs (Comfrey & Lee, 1992). This aspect has not been used before in other researches. Using the factor analysis technique, this research has identified the major factors that influence banking industry in the Middle East.
They include the number of banks operating in the market and the process involved in establishing new branches (Comfrey & Lee, 1992). This tool measures the level of competition among players in the industry. Another variable affecting the banking industry performance is the operating cost. A very high operating cost can lead to high charges and low investments in the industry. Government regulations are also factors that influence the banking industry. The region’s economic growth determines the economic value of the region hence affecting the banking industry and its operations.
Size and duration of loans, Size and duration of deposits, GDP per capita, religious beliefs, global economic stability, and concentration in lending influence the functioning of the industry (AL-Tamimi, 2010). These factors can be summarized in six points, which are, bank’s characteristics, competition, economic pointers, legal environment, political environment, and other factors (AL-Tamimi, 2010). As indicated earlier in this paper, these factors greatly affect the functionality of the banking system in the UAE. It is apparent that these are factors that banking players in the Middle East region must consider for maximum benefits of banking in the region.
References
AL-Tamimi, H. (2010). Factors Influencing Performance of the UAE Islamic and Conventional National Banks. Global Journal of Business Research, 4 ( 2), 1-9.
Athanasoglou, P., Brissimis, S., & Delis, M. (2005). Bank-Specific, Industry-Specific And Macroeconomics Determents Of Bank Profitability. Working paper, Bank of Greece, 1 (25), 1-2.
Comfrey, A., & Lee, H. (1992). A first course in factor analysis. Hillsdale, New Jersey: Erlbaum.
EI Moussawi, C., & Awdeh, A. (2009). Bank Efficiency and Foreign Ownership in the Lebanese Banking Sector. Review of Meddle East Economics and Finance, 5 (2), 3-9.