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UAE Financial Institutions’ Efficiency Factors Thesis



The financial sector and UAE’S economy as a whole have experienced remarkable growth since the global crisis. Banks have embraced technology and have expanded to offer customers easy access to products and services. However, there have been inefficiencies resulting from competition, poor risk management, and poor quality of assets. This sector is extremely significant to the UAE’s economy since it is the second-best performer after the oil sector. Other inefficiencies occur in the real estate markets, the returns on assets, and the total margins, which may slow down growth. Focusing on these inefficiencies helps the institutions in this sector anticipate challenges and plan well.


The banking sector throughout the world has experienced a lot of crises. This is attributed to poor banking practices, inadequate revenue diversification, and capital, credit risks, and currency mismatches among others (Tektas & Ozkan-Gunay, 2006). These shortcomings prompted the introduction of liberalization and reforms in the banking sector in 1991 (Rao & Tiwari, 2008). This research aims at identifying factors affecting the efficiency of financial institutions in the UAE.


The research objectives include:

  1. Establishing the major inefficiency variables of banking in the UAE
  2. To find out how the inefficiency factors affect the financial sector in UAE
  3. To establish the effects of the financial inefficiencies on the national economy
  4. To establish measures that can be created to solve the issues experienced in Banking

Banking Industry

Dynamics in the world economies have resulted in changes in customer behavior, changes in employee needs, advanced technology, and a lot of competition among the financial institutions (Hu, Su, & Chen, 2008). The conception of the World Tourism Organization (WTO) has significantly impacted banks both positively and negatively across the world. The WTO has expanded the financial institution’s competitive field (Rao & Tiwari, 2008). The UAE’s economy heavily depends on the oil sector and the continued growth and expansion of the segments in the financial sector (Mosesov & Sahawneh, 2005).

UAE banks

The UAE banking sector experienced a growth of about 30% between 2005 and 2007. The loans grew by 32% reaching a total of USD 609 billion in the close of 2008. However, the deposits experienced a slow pace of 27% and reached USD 725 billion at the end of 2008. The country’s growth and profitability were hindered by inadequate wholesale funds available during the global crisis. The investment portfolio securities were also under pressure. The performance of the UAE banks was materially impacted by the global crisis. The area that was affected most is the returns generated from total assets. Other areas include the reduction in the total margins and slow growth. This affected both Islamic and non-Islamic banks both local and international (Mehta, 2012).

The financial sector is focusing on reaching a greater number of customers through expansion. This sector has benefited from advanced technology and concentrates on quality customer service. Competition has also increased as foreign investors have joined the industry. This industry has grown due to the increase in the expatriate population. Both domestic and foreign banks have invested a lot in low-cost distribution channels like Internet banking and automated teller machines. The figures moved from AED 192,532 million to AED 334,743 million. The Islamic banks have exhibited mixed characteristics: some have fast growth while others are slow. Dubai Islamic Bank (DIB) and Abu Dhabi Islamic Bank are the largest in terms of market capitalization. They are also the most traded of all the domestic banks. Therefore, they have the potential for fast growth registering about 77-83% in asset growth. However, they have low loan deposit ratios of 63-81%. This implies that they attract deposits easily, but are very conservative on the issue of loan approval. According to the financial valuations, the UAE domestic banks, in general, are mixed with and have the lowest market capitalization when compared to deposit ratios in the world. The dividend yields are reasonable although there is a great potential to grow dividends in the future. For these banks to increase their financial performance there is a need to balance deposit growth with lending (Hashmi, 2007).

The banking system in the UAE has developed to include 23 national banks as of 2011 with a branch network of about 768. The electronic customer service units were 26 and this is a significant growth in the UAE’s banking system. In 2011, Deutsche Bank AG and the Industrial & Commercial Bank of China acquired a license to operate wholesale banks. There was also an addition in investment banks: Arab Emirates Invest Bank and HSBC Financial Services Limited that began their operations in the same year. This is an indication that international investors are attracted to invest in the UAE.

Significance of the Study

Many studies have been carried out to determine the factors affecting the banking sector. Although these studies have been carried out in developed nations, it is evident that the banking sector is important in the economies. Kobeissi & Sun (2010) carried research to determine the bank’s performance and ownership in North Africa and the Middle East. This study showed that private banks performed better than public ones. The study was limited by the geographical coverage, and thus the data collected was considered to be too little. On the other hand, Hamadi & Awdeh (2012) researched to compare the performance of domestic banks with that of the foreign ones in Lebanon. This study discovered that there existed a very minimal variation. However, this study assumed that the findings were universal for the whole of the Middle East. It disregarded the regional diversity in those countries.

Another study carried out in Japan indicated that governmental policies influence the banking sector a lot. However, this study was inadequate since it is not applicable in the developing nations (Hanazaki & Horiuchi, 2003). Sufian (2009) determined the profitability of banks in the developing economies of Malaysia. This study showed that credit concentration had an impact on the profitability of the banks. Therefore, profitability was determined by a bank’s level of investment. Lastly, Al-Tamimi & Charif (2011) identified liquidity and concentration ratios as the factors affecting the performance of conventional and Islamic banks. Branch numbers and their costs also affected the bank’s performance. From the study gaps left by researchers, it is evident that the fast-growing developing economy of the UAE has not been covered adequately. On socio-demographic grounds, the UAE depicts a good Islamic economy for studies (Hashmi, 2007). This research can be used to analyze several banking sectors in Asia and Africa.

The banking sector contributes a lot to the UAE’s economy, as it is second after oil production. Therefore, it is essential that the challenges affecting this sector to be addressed to ensure that the chances of experiencing crisis be minimized. It will also help in establishing whether the structural reforms that have been put in place have contributed to the growth experienced in the economy. Since the UAE’s financial sector was affected by the global crisis in the past, this study is relevant in establishing the causes of such a crisis. It helps in illustrating the various factors that are likely to cause underperformance by the financial institution. This information is suitable for institutions to anticipate future challenges and plan on ways to counter such challenges.

​During recent times, global organizations and financial institutions around the world are witnessing many financial ups and downs. The banking sector is no exception and as such, all the banks are facing great difficulties in maintaining their profit levels. Moreover, sustenance has also become a major issue. Due to the founding of the World Trade Organization, many changes have come into force in the global financial structure. Financial institutions the world over have been forced to reevaluate and restructure their system and policies due to various provisions of the World Trade Organization, such as “deregulating the financial sectors and financial services, the increasing use of information technology, and the huge speed of dispensing financial information” (Al-Shamsi, Aly & El-Bassiouni, 2009). The financial institutions in the UAE need to be at par with their global counterparts to sustain the competitive edge. There are financial giants around the globe that are waiting for an opportunity to enter the lucrative UAE market and take control. It is up to the UAE financial institutions to safeguard their interests. Moreover, despite the massive funds that the financial institutions of the UAE have, they remain small in comparison to the global banks (Limam, 1998). Considering such a situation, it becomes imperative to study the factors that have an impact on the financial institutions of the UAE.

Study questions and hypotheses

The research questions to be answered by way of this research are as under:

  • What are the factors affecting the performance of financial institutions in the UAE?
  • How is the performance of a financial institution measured?
  • What is the relation between input and output of a financial institution?
  • How do input and output matter in the performance of a financial institution?
  • What are the major inefficiency variables about the financial institutions in the UAE?
  • How does the underperformance of financial institutions affect the national economy?


The financial institutions in the UAE must restructure their policies – and improve their DEA rating – to be at par with the global financial institutions to sustain the competition.

Research Limitation

Since our research relied on literature materials, the research met several obstacles. Most financial institutions’ information is based on the developed western nations. As a result, getting exact information from the target area was met with a lot of difficulties. On the other hand, there are numerous efficiency variables, which are difficult to analyze due to their variations (Mazhar, 2003). Banks do not share most of their internal information and at times the information given might fail to reflect the true picture of the organization.

Most research material in the Middle East was mainly based on large geographical areas but with a limited sample population, thus the conclusion of this paper might fail to give information with the highest degree of accuracy. Managing literature data is not easy; most researchers adopted different research methodologies hence harmonizing all these data are very difficult.

Literature Review

The global financial sector has witnessed forceful pressure since the international fiscal structure is developing fast owing to the effects of the creation of the Global Trade Association. “Deregulating the financial sectors and financial services, the increasing use of information technology, and the huge speed of dispensing financial information are also among the factors leading to reevaluating and restructuring of financial institutions worldwide” (Hossein & Lamia, 2010). In light of these developments, players in the financial sector are increasingly monitoring the efficiency of monetary institutions in dispensing fiscal services. The UAE financial segment is no exception. The economic stability of the Middle East region relies on the UAE monetary institutions. Assessing the efficiency of the UAE fiscal segment can help determine its level of preparedness to deal with its global competitors who may soon be interested to extend their presence in the UAE market.

The UAE hosts around forty-seven banks; twenty-three of them are national banks. Five of the countrywide banks operate in line with Islamic principles. The twenty-five remaining banks are multinational. “The Central Bank of the UAE advises the government on monetary and financial issues, issuing currency, maintaining gold and foreign currency reserves, formulating credit policy and providing regulation and supervision” (Hossein & Lamia, 2010). The banking sectors in developing nations need serious examination since they lack a standard ‘transitory trend’. Many fiscal analysts have examined the USA, EU, and Japan monetary institutions; however, there is a dearth of analysis on the efficacy of the monetary institutions in transition. This has led to inadequate literature on the efficiency of transition economies. Much information is available that aims at revealing factors that influence the financial performance of banking institutions. In many cases, “bank profitability, is measured by the return on assets (ROA) and/or the return on equity (ROE), is typically expressed as a function of internal and external determinants” (Allen & David, 1997). Thus, this literature review seeks to determine the factors that affect the efficiency of financial institutions in the UAE.

According to Forsund and Hjalmarsson, 1974 “efficiency refers to a statement of the performance of processes that transform a set of inputs into a set of outputs which determine bank efficiency” Indeed, efficiency involves the comparison of a financial component against a standard component. Technical efficiency refers to the changing material inputs like services of personnel and equipment into outputs comparative to best practice. This implies that the current technology prevents the misuse of inputs at all in producing the specified amount of output. A best practice firm should have 100 percent technical effectiveness. A company whose efficiency is below 100 percent is partially efficient. Administrative practices and the level or magnitude of functions influence technical effectiveness. Essentially, Data Envelopment Analysis assists in recognizing yardsticks for which monetary institutions can aim their performance (Hu, Su, & Chen, 2008). Firms that are not well organized can embrace the operations of the efficient companies that are on the well-organized frontier by applying the best input and output combination. The best practices of well-organized firms if adopted can reorganize the unproductive company’s management and operations to advance their performance. This analysis assists in understanding the nature of a company’s efficiency; hence, it offers important guidelines for studying the determinants of UAE monetary efficiency.

Hossein and Lamia compared the efficiency of the monetary institutions in the UAE with those established in the Gulf Cooperation Council (GCC). The study was carried out from 2000-2005, and it involved the assessment of how efficient Islamic financial institutions are compared to conventional banks. The study employed non-parametric methodologies and productivity index in measuring the effectiveness of the banks. According to the findings of this study, banks operating in the GCC demonstrated comparable levels of effectiveness. Financial institutions operating in Kuwait and Qatar were more efficient than the UAE were. On the other hand, the UAE banks proved to be more effective and productive than the rest of the GCC banks.

The bank of Dubai followed by Abu Dhabi bank was the most efficient commercial bank according to this study. During the analysis, UAE banks registered a remarkable level of effectiveness of 4 percent, but the GCC banks showed a decline of effectiveness of similar magnitude. The UAE banks performed well in both technical pure efficacies; however, they were weak in the scale of effectiveness. The legal framework in which these financial institutions operated influenced their level of growth and efficiency. The efficacy of the GCC banks fluctuated because they rely much on the oil proceeds, which are not stable due to the unstable oil prices. “While previous studies have consistently shown the higher efficiency of GCC Islamic banks over their conventional counterparts, this analysis show inconclusive results concerning the comparative numerical efficiencies of Islamic versus conventional banks at both the UAE and the GCC levels” (Hossein & Lamia, 2010).

Khalid assessed the performance of the Saudi Arabian monetary sector in 2007. He used the Data Envelopment Analysis (DEA) as a key tool for examining the efficacy of the banks in this country. “Data Envelopment Analysis is a linear programming model that measures the efficiency of Decision Making Units (DMUs) in multiple-inputs and multiple-outputs setting” (Khalid, 2010). The results indicated that Saudi financial organizations were generally thorough in managing their fiscal resources. “The empirical results revealed that the mean efficiency of the Saudi Arabian banks during the year 2007 was 86.17 percent and 93.9 percent as per Charnes–Cooper–Rhodes (CCR) and Benefit Cost Ratio (BCR) approach respectively” (Khalid, 2010). “Benefit cost ratios (BCR) indicate the connection between potential profit and expenses, both quantitative and qualitative, of undertaking new projects or replacing old ones” (Khalid, 2010). “In the DEA approach, previously formulated by Charnes, Cooper and Rhodes (CCR), effectiveness is defined as a weighted sum of outputs to a weighted sum of inputs, where the weights structure is calculated by means of mathematical programming and constant returns to scale (CRS) are assumed” (Khalid, 2010). Thus, it is imperative to perform a similar analysis in the UAE to determine how its monetary sector has performed in recent financial years.

Casu and Girradone conducted a frontier efficacy investigation of some monetary firms operating in Italy. The survey aimed at giving an in-depth evaluation of the experiential estimations of bank efficacy. The survey findings demonstrated that various approaches to assessing efficiency do not automatically yield dependable results. For instance, the impact of amalgamations on profit effectiveness has not given consistent results. In some cases, mergers led to the profitability of the financial institutions, while in some situations it led to significant losses (Casu & Girardone, 2002). In general, depository monetary firms such as banks and credit unions analyzed in this study registered approximately 77 percent. The resemblance in average effectiveness for financial institutions across various frontier models did not have any significant difference with the positions of individual companies by their effectiveness levels across models. “This suggests that estimates of mean efficiency for an industry may be a more reliable guide for research purposes than are estimated efficiency rankings of firms and that analysis of the causes or correlates of efficiency should be viewed with caution” (Casu & Girardone, 2002). Although this study applied multiple approaches in analyzing the effectiveness of monetary firms, it lacked information on the issues that affect the effectiveness of monetary institutions.

Hussein attempted to find out the primary factors that determine the success of the Islamic banks operating in the UAE as compared to the commercial banks in that region. This study took place from 1996 to 2008, and it applied a regression model that involved the application of both the return on equity (ROE) method of analysis and the return on assets (ROA) approach. The outcome of the analysis revealed that the level of a bank’s cash flow and concentration mainly influenced the effectiveness of the performance of national monetary firms. On the other hand, the operation costs and the number of outlets were the primary factors that affected the success of Islamic banks. In the UAE, the favorable operation costs of Islamic banking have influenced some conventional banks both national and international to shift to Islamic banking to remain competitive and profitable (Hussein, 2008).

In 2009, Fatima and Hassan measured the efficacy of the UAE monetary firms and identified the factors influencing their success. Their descriptive examination of the UAE monetary segment indicates that it is vibrant and greatly advanced in organization and size and it uses sophisticated banking technology. The government bolsters the UAE monetary sector and this has enabled it to maintain a high standard of effectiveness. For instance, the government uses vast resources of the UAE to support the monetary sector when it faces losses. The success of the UAE monetary segment is also due to the absence of serious competition since foreign banks have not fully infiltrated the UAE market. Nonetheless, “the empirical results of efficiency measures indicate that the UAE banks’ overall average of cost efficiency is quite low as compared to those of the developed countries” (Al-Shamsi, Aly & El-Bassiouni, 2009). The outcome further revealed that the government’s influence and investment in the monetary sector negatively affect the monetary sector.

Lastly, “the results indicate that the UAE banks are able to use their input resources more efficiently when they have more branches, and that newer banks are performing better than older banks on average” (Jham, Genderen & Khanzode, 2012, p. 772). A similar assessment was done in, China and it gave comparable outcomes. Lee, Cheah, and Koay examined the technical effectiveness of monetary institutions in Malaysia in 2001-2005 (Lee, Cheah, & Koay, 2011). Their assessment revealed that newly created private banks in Malaysia were more technically effective than government-owned conventional banks. The outcome was comparable to another analysis by Roman and Anita who found out that government-owned banks demonstrated low effectiveness than private and foreign banks (Roman & Anita, 2004). The study recommended that Malaysia should reorganize its local banking activities in readiness for an international competition because the banking industry is becoming more dynamic. However, the study fails to give suggestions for bridging the structural gaps witnessed in the monetary sector of the UAE.

Enur and Arzu applied the DEA methodology in gauging the level of efficacy of conventional national monetary institutions that operate in countries with transition economies like Chile, Mexico, Thailand, Indonesia, and Malaysia among others. They also aimed at finding out how policies influence the operations of national banks. The survey indicated that banks that command a huge market share are more effective compared to those that target small markets. They also revealed that financial institutions operating in nations with vibrant economies tend to be more efficient since they can get more deposits that enable them to have steady liquidity. “The study revealed that while privatization of state-owned enterprises, enterprise competition and corporate governance related improvements are important in boosting commercial bank efficiency, the securities market and non-bank financial institutions development hinders the efficiency of banks” (Enur & Arzu, 2006).

The management practices and policy goals of a given financial institution affect its capacity to excel in its monetary activities. “This survey reveals some of the efficiency determinants that the UAE financial organizations are likely to experience; they include the level of liquidity, credit risk, capital adequacy, operating expenses management, and bank size” (Enur & Arzu, 2006,). Internal determinants of financial success are greatly affected by the management practices of a financial institution. Management decisions automatically determine the operating outcomes of monetary institutions. Outstanding management practices culminate into the good performance of a given financial institution. Nonetheless, it is not very easy to examine administration quality directly. Indeed, it is presumed that good management practices would be revealed by operating performance. Consequently, it is not strange to scrutinize the fiscal performance of a bank by assessing its monetary variables established in its financial statements such as the balance sheet and revenue reports. Balance sheet records are common pointers of the revenue generation capacity and the cost of financial institutions. “The determinants that receive most attention in the banking literature are costs, asset and liability composition” (Enur & Arzu, 2006). The capital ratio is one of the primary instruments for gauging the bank costs and external determinants mainly involve the microeconomic arena within which a given monetary institution operates.

Finally, the recent international monetary crisis had serious ramifications that the UAE monetary institutions had to grapple with. Maher and Jemma did a comparative assessment of how Islamic banks and national financial institutions operated during the crisis (Maher & Jemma, 2010Specifically, they scrutinized how the crisis influenced the productivity and asset development in various countries that have these two categories of banks. The study showed that the financial crisis had varying effects on these two financial institutions. Islamic banks were able to mitigate the ramifications of the crisis while the conventional banks were the hardest hit. In particular, the Islamic banks remained stable since they adhered to the Islamic banking guidelines that barred them from venturing into some of the investment schemes that led to serious losses among conventional banks.

Therefore, the global monetary crisis acted as a litmus paper for testing the efficiency and resilience of Islamic banks. The crisis revealed the urgent need to solve important constraints in Islamic Banking services. The crisis has further led to the greater acknowledgment of the significance of liquidity perils, and the necessity for a well-organized bank resolution structure. Therefore, creating a properly performing liquidity administration system is a key priority. Moreover, controllers and quality-managers for Islamic Banks should make sure that the decision-making and lawful infrastructure, as well as for bank decree, remain pertinent to the fast-altering Islamic monetary landscape and international developments. Improvement initiative in this case should be in line with the worldwide restructuring program. Better convergence and coordination of guidelines and products is required to enhance a well-organized and sustainable development of the banking sector.

The above literature review demonstrates that the efficiency of each bank outlet and the effectiveness of the daily banking process determine the general effectiveness of conventional firms. Thus, a bank that is aiming at attaining a high level of overall efficiency should first ensure that the sub-factors are well coordinated. The effectiveness indicators are in service proceeds per division, spread per local office, deposit per outlet, and advances per outlet (Nageshwar & Shefali, 2008). The branches operating in remote areas can produce better outcomes if they are properly structured. The streamlining of the banks should focus on mitigating the overall operation costs to boost the productivity of national banks. The managers of conventional banks can encourage their staff to go for early retirement as a way of minimizing operation costs.

Adoption of the current banking and computer technology can significantly improve the competence of the bank personnel. National banks should avoid creating several outlets because they lead to high operating expenses. Consequently, “it is a matter of vital importance for bank managers, bank regulators, and the Central Bank authority of the UAE to get full information about the bank’s economic efficiencies” (Chang & Chiu, 2006). This is because ineffective banks are likely to make serious losses, which may make them less competitive in the already saturated banking industry. The effectiveness of the monetary institutions also influences the development of the economy (Ashish & Sunil, 2012). In other words, if banks are ineffective, the economy tends to perform poorly. Lastly, it is worth noting that effective banks are the only ones that can cope with the ever-increasing competition in the global financial arena.

I have contributed to this research by examining various publications and research works on the primary determinants that are likely to influence the efficacy of various financial institutions based in the UAE. Most of the publications reviewed in this study have focused on the efficiency determinants that affect financial institutions in both developed and developing countries. This has enabled me to identify several gaps in various articles that describe financial efficacy; hence, I have made informed recommendations that can be applied by UAE monetary institutions to realize better efficiency in their financial operations.


For the study of the factors affecting efficiency in financial institutions within the UAE, the study formulated a couple of questions to facilitate the meeting of the objectives of the study. Its goal is to analyze financial institutions’ efficiencies in the UAE. Most researches available are based on information collected from western world economies and to bridge this gap, the research aims at studying the UAE economy and creates a comparison (Tektas & Ozkan-Gunay, 2006). Research objectives include finding out the major inefficiency variables in the UAE financial institutions, to find out how inefficiency factors influence the productivity of financial institutions in UAE, to determine the impact of financial inefficiencies in the national economy (Al-Shamsi, Aly & El-Bassiouni, 2009).

Using a nonparametric approach there will be an assumption that the variables used are non-negative to counter the possibility of negative data (Squalli, 2006). Through an examination of Premises and fixed assets, Administrative expenses, Interest expenses, Capital, Deposits and Staff expenses as the inputs, and Total deposits Total loans, Interest income, Non-interest income, Interbank loan and Demand deposits as outputs, there was the examination of efficiency using efficiency ratio analysis approach in analyzing of income statements and balance sheets. The efficiency ratio analysis method was chosen for the study because of its relevance in the determination of the specifics of the DMU of inefficient and efficient institutions. The efficiency ratio analysis system helped with the creation of a standard for setting efficient banks and compared with their less efficient peers. This produces scores of 0 or 1. Efficient banks had a score denotation of 1 while the efficient ones were denoted 0.

Efficiency = output / input.

Using the efficiency ratio analysis methodology, inputs weighted against outputs and by studying the N in DMU within the financial institutions, inputs are represented by n and outputs (Henderson & Hainsworth, 2007).


The sample size consists of 18 banks of UAE banks. It is important to use a sample size, which is not more than available variables. The study will cover data from bank records and databases. Details of the balance sheet and income and expenses will be extracted from financial reports of banks from the Abu Dhabi securities exchange publication for the 2011 financial year. The study will use balance sheets and other financial reports provided by the banks. The 18 banks are used in the sample, reported consistent output and input variables required for the analysis of the period of 2010-2011.

For the analysis of efficiency issues, there will be an analysis of output and input variables. There are no input and out variables expressly qualified for efficiency studies in the financial sector. However, the acceptable choice of examples for use in this study will be considered inputs as Personnel expenses, Administrative expenses, Non-interest income, and Equity and outputs as Total deposits, Interest income, Interest expenses, and Customer Loans (Tektas & Ozkan-Gunay, 2006).

Part of the sample consisted of the consolidated financial statements for the year ended 2011. The analysis is for 18 banks in the UAE which are:

  1. Abu Dhabi Islamic Bank
  2. Abu Dhabi Commercial Bank
  3. Bank of Sharjah
  4. Commercial Bank of Dubai P.S.C
  5. Commercial Bank International
  6. Dubai Islamic Bank
  7. Emirates Islamic Bank
  8. Emirates NBD Bank
  9. First Gulf Bank
  10. Invest Bank
  11. Mashreq Bank P.S.C
  12. National Bank of Abu Dhabi
  13. National Bank of Fujairah P.S.C
  14. National Bank Of Umm Al-Qaiwain PSC
  15. National Bank of Ras Al-Khaimah
  16. Sharjah Islamic Bank
  17. United Arab Bank
  18. Union National Bank


To examine the hypothesis of the study, there will be an evaluation of the performance and efficiency of the banks understudy for a given period. There is a representation of production functions to represent the efficiency with estimations and evaluations through efficiency ratio analysis. The use of efficiency ratio analysis is mathematically inclined in the measure of efficiency (Tektas & Ozkan-Gunay, 2006). The calculation of non-parametric frontiers involves the evaluation of DMU such as banks in the UAE in this study. The principle of the DEA is to focus on productivity and efficiency. If bank C can use X (C), input for the production of Y output units other banks should be in a position for the same standards for efficient operation. Similarly, when bank Z spends several inputs that is equal to X (Z) giving rise to Y (Z), the situation means that the manufacturer has the acumen to produce equal amounts (Henderson & Hainsworth, 2007).

By using the efficiency ratio analysis model, there are no functional generalizations. DMUs can be within the range of the frontiers or they have to stay below. Bank B and C will be combined to create a comparison of the inputs and outputs for analysis. These sets will be compared with the inefficient bank. For all the efficiencies of DEA and DMU, the study makes identification of their sources and the reasons for inefficiency (Tektas & Ozkan-Gunay, 2006).

Table 1: Selected choices of Input and Output Variables in Efficiency study (Berger, and Humphrey, 1991; Berger and Mingo, 1997).

Output Input
Total deposits Administrative expenses
Total loans Staff expenses
Interest income Interest expenses
Non-interest income Non-interest expenses
Interbank loan Premises & fixed assets,
Demand deposits Deposits

Table 1 depicts the output and input variables according to the efficiency ratio analysis method. DEA is a “linear non-parametric method to measure efficiency of a homogenous set of Decision Making Units (DMUs)…For every DMU the model determines the input weight (vⱼ) and output weight (uᵢ) that maximize its efficiency scores” (Anton, 2012, p. 129).

For the operating efficiency model, there was an examination of the operation of the institutions focused on the operational expenses and employee expenses. This was through the evaluation of total deposits, the number of transactions, and the valuation of tall loans. By use of this model, the study is capable of analyzing the abilities in the institutions, which make them capable of efficient operation (Henderson & Hainsworth, 2007). The relationship between input and output in financial institutions comes from the interest and operating costs with principle outputs coming from non-interest income, interest income, loans, and deposits from principle outputs (Berger and Humphrey, 1991).

For the probability efficiency model, there will be an examination of profitability and revenue efficiency by use of two outputs and three (Tektas & Ozkan-Gunay, 2006). These inputs comprise employees’ expenses, interest expenses and any other operational expenses. The outputs will be non-interest revenue and interest revenues. The financial ratio analysis is the other method the study will use. It will be the comparison of financial ratio analysis and DEA results made up of employees’ salaries, operating incomes and benefit tom interest expenses, and operating expenses (Hassan Al-Tamimi, & Jellali, 2013). The procedure for running conducting the study will start by running the efficiency ratio analysis model of the financial institutions separately for the projection of inefficient institutions against the efficient frontier. This creates virtual units. It then requires a combination of the units run in step one and the testing of the hypothesis to average the efficiency capacities of the financial institutions presented in the second step as equals. Finally, small institutions are combined so the adjustments can eliminate any efficiencies of management as measured by the DEA model (Berger et al., 1997). Therefore, it remains that the DEA model is the best for testing the hypothesis of this study. Its instruments provide the opportunity of answering the research questions focused on determining the factors that affect efficiency in financial institutions in the UAE (Hassan Al-Tamimi, & Jellali, 2013).

This study attempts to evaluate the research study’s hypothesis. The analysis will be based on an evaluation of the performance and efficiency of 18 banks in the year 2011. Efficiency ratio analysis will be used to determine the level of efficiency. The method is used to measure production efficiency by comparing the output and input. Input refers to the capital that the bank invests in the business while the output is the amount of revenue it obtains. DEA method seeks to determine their efficiency in terms of how much output they produce per given unit of output (Mohan, & Ray, 2004). The method also indicates the degree of inefficiencies of various units measured. Based on this method, efficiency is ranked between 0 to 1 or 0 to 100% (Mantri, 2008). In the research, data for inputs and outputs of the various banks are collected. Total input and total output for each bank are computed. Table 2 summarizes the total input and output for the eighteen banks.

illustrating the total input, output, total output/input ratio, and efficiency of 18 financial institutions in UAE as of 31/12/2011
Table 2: illustrating the total input, output, total output/input ratio, and efficiency of 18 financial institutions in UAE as of 31/12/2011 (Financial reports, Adx, 2011).

Table 2 depicts the efficiency scores of major banks in the UAE. As per the standard of scoring, if the efficiency score is 1, the performance is considered to be excellent and as the scoring decreases, the performance is also considered to be decreasing. It is evident from the table that except for RAK bank, all other banks have a score of less than 1. It determines that RAK is the top-performing bank in the UAE.

From table 2, it is not possible to ascertain the efficiency of the banks. A common technique that can be used to compare the performance and efficiency of the various banks is ratio analysis. The next step would require computing ratios of output and input for each bank. The results are shown in the table. From the ratios computed in table 2, it is evident that the RAK Bank has the highest ratio of the total input to total output amounting to 0.89. The Abu Dhabi Islamic Bank follows this with a ratio amounting to 0.73. The bank with the least total output to total input ratio is Sharjah Islamic bank with a ratio amounting to 0.48.

From table 2, it is only possible to compare the ratios of various banks among themselves. It is not possible to ascertain the degree of efficiency or inefficiency of the banks. To obtain the degree of inefficiency, the ratios of total output to the total input of the banks will be compared to the bank with the highest total output to input ratio. Table 2 summarizes the ratio of various banks expressed as a percentage of the bank with the highest value that is RAK Bank. Also, table 2 shows the relative efficiency of the banks. The DEA approach cannot show the absolute efficiencies of the banks. It only gives the relative figures based on the most efficient banks. Finally, Table 2 summarizes the rank of the banks based on the relative efficiencies.

In summary, the DEA approach gives an ideal means of estimating the relative efficiency of various units under study. The approach compares the input and output of various units, branches, or banks within an organization or an industry. The approach helps an organization or a unit to improve on or do away with areas of inefficiencies.

Competence of RAK Bank

The national bank of Ras al-Khaimah is called RAK Bank. It is a joint public company for stocks that offer joint services to the citizens of the UAE. It has about 7.1 billion dollars as the total assets and one of the most competitive banks in UAE. The government owns about 53 percent of the shares in the bank. Top officials of the bank come from prominent Emirate families in the UAE. It provides its services to corporate bodies, small businesses, and retailers (Kettell, 2010). It was classified as the best bank in the UAE in 2012. From the results discussed in chapter three, it is clear that the bank has a high return on the assets. It has a hundred percent output for the input it makes in business.

The bank’s competence can be accounted for by various factors within its structure. Firstly, the bank has a wide network within the UAE. It has about thirty-three branches in the federation. This enables the bank to reach many clients in its system and get higher returns. The high number of customers enables the bank to compete with the other banks favorably. As a result, the output is very high and the income rates are economically viable. The statistics in chapter three shows that the inputs equal the outputs.

RAK bank uses technology for operations and advertisement. This approach is a competitive strategy that helps them to gain popularity and attract the attention of investors in the company (Laudon & Traver, 2009). It has integrated into almost every technology that is useful to the customer in its operation. For example, the bank uses online banking, mobile banking, and phone banking. The integration of the various forms of the technology enables the bank to serve the clients easily. Customer’s satisfaction encourages them to carry out transactions in RAK bank. This has been an important pillar to the prosperity of the bank. In addition to technology, it adopts the recent modes of payment and saving. Therefore they use credit cards, Debit cards, and prepaid cards. Moreover, the bank advertises itself through Facebook, Twitter, YouTube, and Google maps. The wide inclusion of technology helps it to become competitive and solvent than most banks in the UAE.

The bank has incorporated various forms of businesses in its services. For example, it offers insurance services to its customers. When the bank offers services that are related to banking they have an advantage over other banks. This is because the client prefers getting the services simultaneously into funding for the services in a separate place (Kenny, 2009). This is the principle of diversification. The principle asserts that a diversified business is self-insured. It makes a self-insurance against low business periods and maintains its solvency.

Another crucial source of its competence is the marketing approach they use. They assert that the advertising messages should follow the four Cs rule. The rule asserts that the messages should confident, combative, clear, and cheeky. It advertises itself by maintaining a firm economic stand during economic downturns and depression (Kenny, 2009). This stand induces the clients’ confidence and encourages investment. In its advertising structure, it uses prominent products and events to convince people to use their services. For example, the bank encourages clients to buy jewelry during valentine using a credit card. This captures the interest of the clients and promotes business (Laudon & Traver, 2009). The banks participate in social events that help it to advertise itself. The events include environmental initiatives, providing educational support to the citizens, and other events. This approach helps in creating a good reputation in the community (Kettell, 2010).

The population of a country, region, or continent may play a great role in the performance of financial institutions. This is significant if the population contributes to increased economic activities within the respective region. The population of UAE has been increasing over the past years and the trend is most likely to continue considering the past increase. The effects of the increasing population of the country on the efficiency of the financial institutions will be reviewed. Furthermore, the expected population in the future will also be determined to a forecast of the likely effects on the financial institution’s efficiency. The influence of population growth in economic activities will also be studied because economic activities influence the efficiency and performance of financial institutions, especially lending institutions (Khalid, 2010). Also, UAE is globally known in the economic and financial market because of its oil. Oil is one of the major contributors to the performance of most financial institutions in the UAE.


This chapter summarizes the results/findings of the study that was carried about the factors that affect the efficiency of financial institutions in the UAE. The study objectives included finding out the major factors that effects efficiency in the UAE financial organizations to find out how inefficiency issues impact the productivity of financial organizations in the UAE.

Nonparametric results

Through the usage of the non-parametric model, there was an assumption that was made, that the variables used are non-negative to overcome the probability of having negative data. The study involved analysis of premises & fixed assets, administrative expenses, interest expenses, capital, deposits, and staff expenses as the inputs, and deposits, loans, interest income, non-interest income, inter-bank loan, and cash & balances with UAE Central Bank as outputs, there was the examination of efficiency in analyzing of income statements and balance sheets. The banking system was chosen for the study because of its relevance in the determination of the specifics of DMU of inefficient and efficient institutions. The non-parametric system helped with the development of a standard for setting efficient banks as well as comparing them with their less efficient counterparts.

Table 3 showings the efficiency ratio analysis model carried out on 18 financial institutions operating in UAE as of 31/12/2011. Financial reports, Adx, (2011).

Bank Total input AED’000 Total output AED’000
Emirates NBD 448,279,735 258,837,999
NBAD 416,136,794 254,485,831
ADCB 307,961,274 182,174,250
FGB 264,792,815 143,264,123
DIB 158,507,240 75,629,279
UNB 145,240,717 80,877,360
ADIB 132,491,586 97,100,822
MASQ 123,749,155 71,043,205
CBD 68,051,848 36,527,882
EIB 39,612,187 19,071,481
BOS 36,963,019 19,498,267
SIB 29,349,913 13,948,908
RAK 28,797,805 25,537,879
NBF 25,853,278 14,649,872
CBI 20,579,567 10,357,274
UBQ 19,199,764 9,979,103
UAB 18,538,294 11,833,325
INVESTB 18,327,721 10,116,037

Table 3 depicts the results of the efficiency ratio analysis model that was carried out on 18 financial institutions of UAE. The National Bank of Dubai is at the top with the maximum input and maximum output. The Invest Bank is at the bottom with the least input and least output. It is noteworthy that simply having the maximum and minimum inputs or outputs doesn’t certify the performance of a financial institution. It is the ratio that matters.

Table 3 shows that the Emirates NBD with the highest input and output followed by the National Bank of Abu Dhabi. On the other hand, Invest Bank PSC has the lowest input as well as output. It is important to understand that there is a close relationship between the level of output realized by a financial institution and the output (Lee, Cheah & Koay, 2011). The higher the inputs the higher the output that a financial institution. On the other hand, the study revealed that the lower the input the lower output. The result in table 3 can be summarized using the following figure.

showing the relationship between output and input
Figure 1: showing the relationship between output and input as indicated in table 3. Financial reports, Adx, (2011).

Figure 4 shows the relationship between input and output of financial institutions operating in the UAE. The figure shows that as the input from the banks increases the higher the output the banks realize from their operations. One can make a conclusion depending on the trend of the scatter figure whereby the study reveals that the efficiency of the financial institutions operating in UAE largely depends on the inputs that they invest in their banking activities. If, for instance, a bank institution is in a position to attract higher deposits, highly skilled and proficient labor force as well as has adequate capital at its disposal the bank is likely to have a higher number of investments and at the same time it will be in a position to give out the huge number of loans (Maher & Jemma, 2010). This means that the bank in question will in return be able to make huge revenues from its investment as well as loaning activities. On the other hand, the scatter figure indicates that the lower the input the lower the output that will be realized by the financial institution in question.

This is a clear indication that the study revealed that the banks operating in the UAE who do not provide the right inputs are not likely to achieve higher levels of output. For instance, if the banks in question provide inadequate capital for its operations, employ employees who do not have the right skills to perform their jobs and the bank is not in a position to attract a huge number of deposits from its customers then the bank in question will have low volumes of investments and loans. This will in turn result in low revenues. From the scatter figure above, the study shows that the financial institutions operating in UAE largely depends on the levels of input that they can attract (Wang, 2000). Those banks which are efficient in their operations are in a position to attract the right labor force, a huge amount of deposits as well as adequate capital to help in its operations according to the results provided in table 3, On the other hand, the inefficient financial institutions are not in a position to attract the right amount of deposits, adequate capital, and competence labor force to help it realize the right amount of output.

Operating efficiency model Results

In the study, to further determine the efficiency of the financial institutions in UAE I carried out operating efficiency. Operating efficiency in this case was carried out using the operating efficiency model. For the operating efficiency model, there was a consideration of the operation of the banks which focused on the working expenses as well as the worker expenses. This was carried out through the assessment of total deposits, several transactions, and a valuation of total loans given by each of the banks that were used in the study. By usage of this model, the study was able to analyze the capacity in the institutions, which makes them be in a position to operate in an efficient way (Khalid, 2010). The relationship between input and output in financial institutions comes from the interest as well as operating costs with principle outputs coming from non-interest income, interest income, loans, and deposits from principle outputs.

Form the study RAK Bank is the most efficient bank in terms of managing its operating expenses given that it has the lowest level of operating expenses in comparison to other banking institutions that were used in this study. The operating efficiency of any financial institution that was used in the study was measured based on the ability of the bank in question to lower its operating expense and at the same time realizes higher levels of income/net profit (Roman & Anita, 2004). These are very important components that must be taken into account in determining the operating efficiency of a financial institution. Roman & Anita, 2004 argues that from the operating efficiency models it comes out clearly that there are several items in the income as well as a statement of financial position that affects the efficiency of financial institutions in UAE. These factors include non-interest income, loans, deposits, interest income, and other operating costs. The efficiency or inefficiency of the bank in question largely depends on the ability of the bank to manage the operating expenses and increase its profitability.

The study shows that those financial institutions whose operating efficiency management strategies are efficient reports high levels of profits and at the same time those banks whose operating expenses are high due to inefficiency reports low levels of profits thus they can be said that they are not profitable enough (Nageshwar & Shefali, 2008). On the other hand the efficiency of a financial institution, according to the operating efficiency model can be determined by determining the bank’s ability to put its inputs in productive activities that generate a huge amount of returns. In the case of my study, banks that put their inputs in high-risk investments such as real estate and buying of stocks reported huge profits than those banks which had a low number of loans and investments. The ability of the banks according to Wang, 2000 using the operating efficiency model to efficiently manage their operation usually determines the level of profit/ revenue that will be realized by the banks in question. A close look at the income and statement of financial position of the bank shows that there is a close relationship between the ability of a financial institution to lower operating costs and its profitability (DEA, 2003).

Ratio Analysis Results

By just performing a non-parametric test it would not be possible to determine the financial institutions that are effective in managing their resources. Therefore, there was a need to carry out a further test on the efficiency of the financial institution in the UAE by performing a ratio analysis on their output/input to rank them in the order of their efficiency. According to Emrouznejad, 2010 in DEA a fractional programming model, the relative efficiency of all banks is constrained between 1 to be relatively efficient and less than 1 to be relatively inefficient.

From the DEA model, I used a fractional programming model (Emrouznejad, 2010)

Efficiency = ∑ Outputs/ ∑ inputs

The results of the DEA model can be summarized the table 4.

Table 4: Total output/input ratio and efficiency of 18 financial institutions in UAE as 31/12/ 2011. Financial reports, Adx, (2011).

Name of the bank The ratio of output/input Relative efficiency
RAK 0.89 1
ADIB 0.73 0.83
UAB 0.64 0.72
NBAD 0.61 0.69
ADCB 0.59 0.67
Emirates NBD 0.58 0.65
MASQ 0.57 0.65
NBF 0.57 0.64
UNB 0.56 0.63
INVEST 0.55 0.62
FGB 0.54 0.61
CBD 0.54 0.61
BOS 0.53 0.59
UBQ 0.52 0.59
CBI 0.5 0.57
EIB 0.48 0.54
DIB 0.48 0.54
SIB 0.48 0.54

Table 4 depicts the output/input ratio and efficiency of 18 financial institutions in the UAE. These are the same institutions that were considered in table 3. As mentioned earlier, it is the ratio that counts and not the magnitude of input or output. As is evident from the table, National Bank of Dubai, that was at the top in input and output figures, has come down to the sixth position in terms of ratio and Invest Bank that was the last in terms of input and output figures, has come on the tenth position. According to the ratio and efficiency, RAK Bank is the best performing bank in UAE.

This analysis focuses on the issues related to the profitability and efficiency of financial institutions in the UAE. The analysis of ratio analysis is aimed at determining the capability of the company to cope up with its financial responsibility. The profitability test, on the other hand, is aimed at evaluating the ability of the banks to use their resources to generate income and to repay returns to the shareholders of the company. The decision on whether the company is financially stable is purely dependent on the output/input ratios calculated during the analysis. The ratio analysis carried out on the input and outputs of the banks used in the study provides the basis of ranking the performance of the banks in terms of how they can effectively manage their resources and generate profits from them. Table 4 shows that most of the financial institutions in the UAE are not efficient in managing their resources depending on the non-parametric tests that were carried out on their financial statement as 2011.

Showing the ranking of banks depending on their efficiency according to the ratio analysis conducted on their input and output as of 31/12/ 2011.
Figure 2: Showing the ranking of banks depending on their efficiency according to the ratio analysis conducted on their input and output as of 31/12/ 2011. Financial reports, Adx, (2011).

Figure 2 shows that there is a close relationship between the efficiency of a financial institution and the output/input ratio. According to DEA, A., & FDH, f. D. H. (2005), the level of efficiency of a financial institution largely depends on how it has allocated its inputs in income-generating activities effectively so that it can achieve the desired outcome in terms of a huge amount of loans and investment. Figure 2 summarizes the performance of the banks depending on their output/input ratio. According to the graph, RAK bank is the most efficient bank with 100% efficiency while Sharjah Islamic bank is the lowest-ranked bank.

In conclusion, the DEA model gives a perfect means of approximating the relative efficacy of various units under study. The model tends to compare the input as well as the output of various units, branches, or banks within an organization or a sector (DEA, A., & FDH, f. D. H. (2005). The model helps an organization or a unit to improve on or do away with areas of inefficiencies.


It is very clear from the study that some factors affect the efficiency of financial institutions within the UAE region. These factors have a direct impact on the profitability as well as the operational efficiency of the bank in question as shown by the result of the study. It is very important to understand that the study did show that the level of inputs in a bank affects levels of outputs in that bank. The study indicated that non-parameter efficiency measuring techniques cannot be effective on their own thus there is a need to carry out further investigation on the efficiency of the banks in any given region using ration analysis. Therefore, a conclusion can be drawn from the study that for one to determine effectively the factors that affect the efficiency of a bank and be in a position to rank their efficiency there is a need to use a combination of measurement parameters.

Failure to use a combination of parameters may give wrong results that will completely show a different scenario in the banking industry. Accurate information on the efficiency of the banks should be readily available to the investors and the regulators of the sectors for purposes of safeguarding the assets of the investors such as customer deposits and others (Wang, 2000). To come with this accurate information the only way out is using several efficient testing methods both non-parameter and parametric methods. For instance, in the case of my study to determine the efficiency of the financial institutions in UAE, I focused on testing the efficiency within many institutions using profitability and operational efficiency tests and at the same time carried out ratio analysis on the DEA results to rank the efficiency of the banks.

Additionally, the study revealed that issues related to operations of the institutions in question are vital in determining the levels of efficiency within the institutions. Those institutions which have put in place operational regulation measures tend to record high levels of efficiency. On the other hand, if the operations of the institutions are not properly regulated there is a high probability of the institution in question increasing operational costs due to failure of the management to put in place ways of managing wastes within its areas of operations which can go a long way in increasing the efficiency of the financial institutions (Roman & Anita, 2004).

Cost of efficiency also determines the overall performance of the financial institutions. The costs of running the financial institutions such as administration expenses, salaries, and wages among others determine the level of efficiency within the financial institutions. My studies have shown that those financial institutions with high costs of running them tend to be less efficient in comparison to other institutions whose cost of running them is low. Banks that record high levels of efficiency are more efficient when it comes to the management of their costs of operations given that they have a direct effect on the operations of the institutions in question. (DEA, A., & FDH, f. D. H. (2005)

Profitability on the other hand can be used as a parameter of measuring efficiency within financial institutions. The profitability of institutions of paramount importance when it comes to making decisions that are related to whether an investor can invest his or her money in a certain financial institution. In my study, those financial institutions whose net profits were high had similar characteristics whereby their levels of efficiency were high. On the other hand, the financial institution with low levels of profits recorded low marks when it comes to efficiency level. It is important to note that the profitability of an institution should not just be measured by the amount of profit that the institution but rather by the total assets that have been invested in the financial institution in question.

Another important factor to consider when measuring the efficiency in financial institutions is the number of inputs that have been invested in a financial institution such as customer deposits and outputs such as loans that it can give out to borrowers in a given accounting period. This means that the financial institutions need to employ strategies aimed at improving their ability to generate income and reduce expenses for purposes of increasing their profitability so that it can be per with other players in the industry. The management of the company should also come up with measures of ensuring that the stock of the company is devalued for instance, by issue stock in the equity market to keep the value of the stock of the company at the right price. The financial institutions with the highest level of outputs according to my stand recorded high levels of efficiency mark. This means that financial institutions should come with strategies of ensuring that their inputs are put into productive activities that will increase the output realized by the institutions. The DEA test shows the level of input and output among the financial institutions that were used in this study.

Ratio analysis should also focus more on the calculation of different ratios that shows the performance of a financial institution. The ratios that were calculated in this study did help just in ranking the performance of the institutions used in the study but there is a need to calculate specific ratios with income and statement of financial position of the institution in question (Lee, Cheah & Koay, 2011). To determine the financial performance of any given organization many tests can be carried out especially horizontal analysis and ratio analysis are the most effective methods. The methods help in analyzing the profitability, liquidity, leverage, and stability of the firm in question. The three most important ratios in financial institutions are the profitability ratios, liquidity ratios, and efficiency ratios. Profitability ratios are ratios that show whether the company is in a position to utilize the asset base it has to generate income. The ratios are important in determining whether a company is worthwhile investing in it as a shareholder. Liquidity ratios are used to show the competence of the company to meet its financial commitments both in the short run and in the long run. The efficiency ratio is used to determine how the company has been able to effectively manage its operations such as sales in terms of stock management for both production and sales purposes.


One of the areas that the institutions in UAE should focus on to increase efficiency is how to reduce the cost of running the business to increase operational efficiency. In the current economic environment, the objective of any financial institution is constantly to be in a position to increase the efficiency of the way this is run and managed. The institutions should employ measures that are aimed at reducing the costs of operations such as employing new technology to reduce the cost of labor (Nageshwar & Shefali, 2008). They should also improve the quality of services that are offered to the customers to gain a competitive advantage by having a large customer base. According to Wang, a 2000 larger customer base can be used as a tool for reducing the operational costs of running the financial institutions. Thus, all strategies aimed at improving the quality of services that are offered to new and existing customers should be employed by the institutions at all levels of operations.

The financial institution should also focus on issues that are related to human resource motivation. Motivation is intended to achieve some goals and objectives in an institution. First, it helps in building a highly productive workforce. It also ensures that there is a low turnout of employees during the execution of the goals and objectives of an organization. It provides the organization with an opportunity of rewarding the individual efforts of the organization. Additionally, it enables the institutional manager to ensure that the right amount of compensation for their efforts/inputs during the execution of the project. Finally, motivation helps in ensuring that the goals and objectives of building a culture of innovation and creativity in an institution.

Finally, the government needs to come up with a regulatory framework aimed at increasing efficiency in financial institutions to avoid a collapse of institutions such as mergers and acquisition policies can help increase the efficiency in the financial sector within UAE (Khalid, 2010).


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