Effects of Economic Turbulence on Banking Systems in the Middle East

2021-05-17 21:05:18
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Even the non-oil sectors of the UAE have experienced an impact from the low oil prices. The Emirates National Bank of Dubai (NBD) asserted that it was expected that the low oil prices will cause slowed growth and development in non-oil sectors as well as the banking sector. Despite this economic turbulence, the banking industry in this region has experienced a period of asset growth in 2015. Through the issuance of sukuk, the Islamic banks in the Gulf Cooperation Council (GCC) have increased their capital as well as the liquidity. More so, they are looking forward to increasing the capital to asset ratio. Among the Islamic banks that have come together to increase the capital is the Dubai Islamic Bank, Kuwait Finance House, Qatar Islamic Bank (QIB) and the Saudi-based Bank Albilab.

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1.2 Background of the problem

The effects of oil price slump on the Middle East domestic economies have greatly affected the operations of the Islamic banks and other Islamic financial institutions (Abedifar, Ebrahim, Molyneux & Tarazi, 2015). In this regard, banks that provide sukuk have started looking for new markets, as they are not making enough profits due to the slump in the international prices of oil. However, with the global financial crisis-becoming stable, most of the banks have revived their banking business. However, there is no certainty on whether the prices of oil will stabilize (Salim, 2015). In this regard, the economic turbulence in the Middle East has adversely affected the banking system in the Middle East leading to the dampening of investors appetite.

Following the low oil prices affecting the operations of the Islamic banking, many controversial debates have risen with some arguing that the turbulence could pave better deals for the banks (Almanaseer, 2014). Others have it that the turbulence will continue suppressing the banking operations in the Middle East.

By looking for new markets, the banks in the Middle East are likely to improve their operations (Khan & Bhatti, 2008). For example, during the 2008 economic turbulence, the Abu Dhabi Commercial Bank (ADCB) purchased a 25% stake in the RHB Capital, Malaysia fourth-largest lender for $1.2 billion (RM3.88) (Silverman, 2016). During the time of purchase, ADCB paid a 36% premium on the banks price (Silverman, 2016). ADCB made the acquisition amid the prospect of the interest rates hikes and the rising inflation. The bank experienced a robust growth due to the well performing Islamic banks in Malaysia and the strong commercial links between Malaysia and Middle East. Those who support the opportunities that results from economic turbulence also argue that in the United States, companies that made acquisition during downturn make more than triple the return as compared to those that acquire during the boom years (Varli, 2013).

On the contrary, some scholars argue that the economic turbulence in the Middle East will adversely affect the banking sector. They argue that, besides the low oil prices affecting the banking sector, other factors such as civil war and frequent violence experienced in the region will negatively affect the operation of the banking sector in the Middle East (Silverman, 2016). The increasing unemployment among the youths causes the undiversified economies making the Middle East economic prospect to remain grim. Following such unsettled controversies, the researcher assessed the impacts if the economic turbulence on the banking system in the Middle East.

1.3 Statement of the Problem

The decline in oil prices has significantly affected the domestic economies in the Middle East because of the slow cash flow into the region. One of the various areas that have been adversely affected is the banking sector. The banks that provide sukuk have been forced to seek for new market areas in external regions. However, there is still global financial crisis and there is no certainty that the oil prices will stabilize, which poses uncertainty to the banking sector in the Middle East too. In this regard, this dissertation investigates the effects of the economic turbulence on Islamic banking in the Middle East.

1.4 Purpose of the Study

The economic turbulence poses significant effects to the economic stand of the Middle East; one of the greatest causes is the slump of the oil prices. The global economic crisis further poses uncertainty on the stability of the oil prices, and the Economic state in the Middle East. Due to the instability that has resulted in many sectors of the economy, the study aims at assessing the effects that the economic turbulence caused on the Islamic banking in the Middle East. By assessing the impacts, the researcher will be able to provide recommendations on what can be done to save the Islamic banking industry in the Middle East. The dissertation will also investigate how the economic turbulence has affected the potential investors morale to invest in the Islamic banking in the Middle East. By assessing the turbulences impacts on the banking sector as well as investors, the researcher will be able to determine the state of banking in the aftermath of global financial crisis.

1.5 Objectives

To establish the effects of economic turbulence on banking systems in the Middle East

To evaluate how the slump in oil prices has affected the morale of investors in banking

To discuss the state of banking in the aftermath of global financial crisis

1.6 Research QuestionsWhat are the effects of the economic turbulence on the banking system in the Middle East?

How has the turbulence affected the morale of the potential banking investors?

What could be the probable state of the banking in the Middle East in the aftermath of the global financial crisis?

1.7 Significance of the StudyInvestigating the impacts of economic turbulence especially on the banking sector will enhance the understanding of the complexities of the crisis in defining a modern characteristic of the Middle East economy. It will also provide the basis for angst of the job loss, loss of competitiveness in the banking sectors and loss of earnings. Additionally, a comprehensive understanding of the impacts of the economic turbulence in the Middle East will provide detailed insight job ladders and wages, banking career paths, workers job survival and the performance of the Islamic banking firms in the Middle East.

2.0 Introduction

In this section, different kinds of literature will be reviewed which has examined the effects of the economic turbulence on the Islamic Banking in the Middle East. This chapter will intensely elaborate how the various countries in the Middle East have been going through financial crisis and the impacts those crisis has made to the economic growth and the Islamic Banking. Islamic banking can be defined as the taking of deposit that provides all the currently banking activities with the exception of borrowing and lending on interest. It accepts the demand and the deposits that are offered by the clients and are treated as free loans. It carries out loss sharing or debt creating basis in accordance with the shariah laws. The integral part of Islamic banking operations are the equity holding, commodity and assets trading. The study will articulate the gap that has been made on the Middle East Islamic banking and cover the impact of financial crisis, what should be done to solve the demise and what should be avoided because it can lead to banks bankrupsy.

2.1 The Effects of Economic Turbulence on Islamic Banking in the Middle East

The current financial crisis has been viewed as the worst of all since the greatest depression of the 1930s. The review of literature will focus on the impact that the economic crisis has had on the Islamic banking of the Middle East. For an extended period, Islamic banks have had to witness the double-digit growth rate, which surpasses their conventional peers (Almanaseer, 2014). Things seemed to go on well for some time, and the Islamic banking industry failed to exceed a third of total market share even in the Gulf Cooperation Council (GCC) countries. The recent crisis in the international markets has focused its attention on the health of the banking system in each and every country. The structured investment vehicles and the mortgage in related insurance depreciated as it invalidated a lot of behavioral assumptions in risk, reward, hedging models and has been said to leave the financial sector with hidden assets which contained substantial known liabilities ((Almanaseer, 2014)

The ideas that explain the occurrence of the financial crisis on the Islamic banking goes from the academic studies to the daily studies (Sufian, 2014). Some activities like gambling and the principal agent problem have been identified to be the cause of the banks being broke. It has been identified that the crisis found in the system of forthcoming due to trade deficits from the US since the year 2000 is what has spearheaded this demise in the Islamic Banking. There was a lack of information and opaqueness of the credit default swaps and moral hazards as the culprit. In a research done on the performance of the Islamic Banking, if everything else were to be constant, the higher profit would be due to the greater leveraging and superior loan that is necessary to assert all the ratios and the banks that take higher risks (Sufian, 2014). It was clear that the Islamic Banks make more profits than even their counterparts, but the problem was the fact that there was the explicit and the implicit taxes that affects the banking performance measures in an entirely negative way making the banks to incur losses than profit.

The high degree of the imperfect information and the rent-seeking behavior are the key features in which the developing economies of the Islamic banks operate from. The agency challenges come as a result of the conceptual incompleteness and the savings that will be biased towards the debt financing. Islamic finance is found in the principle of partnership and cooperation, and it, therefore, means that it calls for a system of equity participation and the risk sharing. Islamic banking is a community oriented and entrepreneur-friendly which mainly encourages the productivity and the physical expansion of the economic production and services (Sources ???). It, therefore, shifts its overall focus from the financial collateral or the financial worth of the borrower to the entrepreneurs trustworthiness and the usefulness of the project viability ("Special issue on Islamic banking and finance", 2010). The implications, therefore, go to the features and the distribution of the credit risks as well as the systematic stability. Islamic finance can, therefore, be classified as the ethical investment. They are more concerned with the impact of financial decisions on society and attract ethically-sensitive investors.

In the year 2008, there was a financial crisis that was brought forth by difficulties i...

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