Dissertations for Finance

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The Case for Real Estate Investment trusts in Dubai
(The British University in Dubai (BUiD), 2008-11) Di Nardo, Danny N. G.
With Real Estate Investment Trusts becoming an increasingly popular means to invest in the real estate market in the developed countries in recent years, it is of interest to this research whether recent legislation in Dubai will have the similar effects. Despite the growing demand for Islamic Finance products and services in the region coupled with a robust real estate market there have not been any significant studies to engage the concepts of REITs in Dubai and its adherence to Shariah principles. This research examines the basis of Islamic Finance, the theory of capital structure as proposed by Miller and Modigliani (1958), and previous studies on the performance of Real Estate Investments Trust in other markets in order to gauge whether unleveraged REITs in Dubai will optimise a mixed asset portfolio whilst complying with the principles of Islam. Hypothetical Property Trusts have been created to act as proxy for the performance of REITs in Dubai which include one that is debt free and two that are incrementally leveraged. With the local equity market and local corporate bond market representing the two other asset classes that are included in a mixed asset portfolio, it is that of the Real Estate Investment Trusts that have proven to be the dominant asset class. The inability of borrowing to enhance the performance of the Hypothetical Property Trusts gives credence to the ability of unleveraged REITs to optimise a mixed asset portfolio whilst complying with the principles of Islam and hence laying the foundation for the growth and popularity of REITs in Dubai.
A smiling tree: an empirical evaluation on binomial tree methods for local volatility model
(The British University in Dubai (BUiD), 2009-09) Al Alem, Mouaz Abdul Ghani
This study compares between the standard Black-Scholes model and two local volatility models of implied binomial trees for PowerShare index options with regards to the pricing accuracy when evaluated against actual market prices. With Black, F. and M. Scholes (1973): The Pricing of Options and Corporate Liabilities. Journal of Political Economy, volume: 81, pp. 637 – 59 model as a benchmark, two local volatility models were analyzed: Derman and Kani's [Derman, E., & Kani, I., 1994. The Volatility Smile and Its Implied Tree. Risk, 7, 32–39] and Barle and Ckici’s [Barle, S and N. Cakici, (1998): How to Grow a Smiling Tree. The Journal of Financial Engineering, Vol. 7, No. 2, June 1998]. The model suggested by Barle and Cakici shows the best performance followed by Derman and Kani. Black-Scholes performance on the other hands was significantly lower than the two models. This is attributed to the fact that Black-Scholes model adopts a constant volatility regardless of option’s strike price or time to maturity. This finding is consistent at different moneyness levels and for different maturity periods.
Implementing the three factor model of Fama and French on Kuwait's equity market
(The British University in Dubai (BUiD), 2009-12) Al-Rayes, Fatima
Asset Pricing Theory addresses the relationship of security return with security risk which is caused by the unknown possibility of returns. Determining the correct and accurate expected returns has been the major concern surrounding Asset Pricing Theory. For almost half a century, the Capital Asset Pricing Model, Sharpe (1964), Linter (1965) and Mossin (1966), has been the corner stone for determining the asset risk/return relationship. It relies on beta known as the systematic risk in determining returns. However in the 1980’s, criticism arose, which caused empirical researchers and financial practitioners to move away from the so known model. Miller (1999) and many professionals came to agree that the CAPM is no longer a sufficient model to explain the cross section of average returns. A recent alternative was introduced by the work of Fama and French (1993) who brought around two additional risk proxies not shown in the CAPM, one is the small size factor, indicating that smaller firms on average earned more than bigger firms and second book to market equity, demonstrating that firms with higher book to market ratios earn more than firms with lower book to market ratios. The two factors experienced abnormal returns that were not captured by CAPM’s beta. Looking briefly at some of the literature of Fama and French, their (1992) paper proved that security risk is associated with firm size as well as book to market equity. In 1993, they examined a time series approach to their work that was not apparent in their earlier paper. In 1995, their work confirms that book to market equity and size proxy for the sensitivity of the risk factor that explains stocks returns, and secondly that size and book to market equity are explained by profitability and the earnings behavior. In 1996, Fama and French prove that many of CAPM’s anomalies disappear when using their multi index model. Fama and French (1998) discovered that value and small cap stocks earn higher returns for the majority countries under their examination. In this study the Fama and French (1993) model is tested in Kuwait’s market from years 2000-2007. There are two main objectives, first to extend the Fama and French model internationally, to Kuwait, to see whether or not the additional factors of book to market equity and size proxy for risk that help explain stocks returns. Secondly, this study addresses Fama and French’s main controversies. It aims to address the vast majority of practitioners that believe beta alone is sufficed in explaining security returns. In addition, aims from the need to expand Asset Pricing Theorywork internationally as most of their work is conducted in the U.S. Moreover, there is an important need to provide investors a clearer understanding of asset pricing anomalies that can exist. The anomalies discovered by Fama and French defies the whole generation of investors that believe in efficient markets and that asset returns are a result of volatility. Finally, this study aims at shedding more light into the area of asset pricing models in Kuwait; its importance serves many functions such as capital budgeting, security evaluations and investment performance and evaluations. Four portfolios were constructed, (S/L) small cap stocks along with low book to market firms, (S/H) firms that are small in size with high book to market firms, (B/L) big firms with low book to market firms, and (B/H) big firms with high book to market ratios. The returns of the above portfolios are regressed on the market portfolio, a mimicking portfolio capturing the average difference between returns of small firms and the return of big firms and third a mimicking portfolio which captures an equally weighted long position in high book to market portfolio and an equally weighted short position on low book to market ration. Kuwait’s results indicated that the Fama and French model added a marginal effect in pricing securities and especially for those securities that are in the S/L and S/H categories. In addition to finding premiums for small and high book to market firms, our results dismiss most of Fama and French’s controversies. Lakonishok and Vishnay (1994) theory has been disproved since our findings confirm that high book to market premium is not a result of an arbitrage opportunity. We also responded to the ‘Survivorship Bias’ argument by Kothari, Shanken and Sloan (1995) by testing both the firms that failed as well as firms that survived, unlike Fama and French were only the surviving firms were tested, our results thus do not support the ‘Survivorship Bias’ theory. Responding to the ‘Datasnooping’ argument by Lo Mackinlay (1988), Black (1993) and Mackinlay (1995) also took place when testing in an out of sample test as in our example, Kuwait. The only controversy of Fama and French that could not be tested was Daniel and Titman (1997) since we were limited with data to construct portfolios with many different variations in characteristics and factor loadings. Results in Kuwait refute the Efficient Market Theory Hypothesis since our finding confirm that returns are not related to volatility and secondly that Multi Factor Minimum Variance MMV portfolios were discovered that negates the market factor as the only Minimum Variance Efficient MVE portfolio. Overall Kuwait’s results proved that a multifactor model is more explanatory than the CAPM’s beta. This of course has many implications especially in calculating cost of capital and in evaluating portfolio managers. Results though were not as powerful as the model exhibited in the U.S and in some international markets. Reasons might be because of the smaller time period of study in Kuwait, 8 years in comparison to 70 years in the U.S. A second reason might because of the many new joining companies in years 2003-2004 in Kuwait; which negates the possibility of revealing a small and book to market premiums, as these need more time to become obvious.
A study of Risk Management in the United Arab Emirates Banking Industry
(The British University in Dubai (BUiD), 2010-04) Al Hussiny, Shaima
Purpose- This research is an attempt to discuss risk management and its importance to the fundamental operation of banks in UAE & whether the Basel II agreement is still relevant in the current financial crisis, and whether it has helped contribute to the severity of the downturn by creating capital shortages at banks in the UAE and in general. Design/methodology/approach-Questionnaires were distributed to key risk managers in a sample of UAE banks .The questionnaire is composed of three main parts with a total of 42 questions. The first part consists of 12 questions & focuses on obtaining ordinal judgements of the ranked importance and effectiveness of the five main risk management techniques identified by the literature review. The second part consists of 28 questions & was used to answer the 4 research questions; the degree of understanding & implementation of risk management, the most efficient tools and techniques available for the management of risk, the extent to which managers are aware of the risks that are associated with their actions and goals & if Basel II agreement assisted or hindered risk management amongst banks in the UAE. It is based on a five point Likert scale ratings of individual factors. The third section includes two open ended qualitative questions designed to obtain more subjective details from the employees around their specific attitudes towards, and understanding of, risks and risk management, as well as clarify their answers to the quantitative questions. Findings-– Based on the results of the analysis in this study, it is concluded that the UAE banks are only facing a relatively narrow range of risks, and similarly are not using a particularly diverse range of risk management practices. As such, they focus on the relatively blunt tools of risk mitigation and risk elimination, rather than taking a more advanced strategic approach. As the UAE is currently in something of a transitional period, with Basel II in the process of being implemented, the study should be repeated once implementation is A study of Risk Management in the United Arab Emirates Banking Industry complete. This will help produce a better understanding of the impact of Basel II on the UAE, as well as demonstrating how the implementation of the Basel II agreement has changed risk management practices in general.
Operational risk management under Basel ll - A case of UAE banks
(The British University in Dubai (BUiD), 2010-05) Tawalandana, Nilani
This thesis examines the ORM process in UAE banks in the light of Basel II Accord. The research also dwells into the concept of operational risk management with detailed study of the nature and characteristics of operational risk. The thesis studies the effects operational risk in the banking industry and shows that if not managed or controlled this risk can cause havoc to the organization. Operational risk management is an ongoing process and the banks need to develop and implement procedures and systems and evolve these systems to adapt to changes in the environment. This research studies the ORM framework of UAE banks with the help of a survey that was answered by the Risk Managers of various banks. The research gives information regarding the ORM processes in these banks and the various methods and tools used for the process. The research provides in depth study of ORM process in UAE banks and helps in assessing the efficacy of the programme.
How risky sukuk are: comparative analysis of risks associated with sukuk and conventional bonds
(The British University in Dubai (BUiD), 2010-05) Nanaeva, Zhamal K
Recent issues of Islamic bonds were “welcomed” with broad criticism, both by Islamic scholars and conventional investors. Presented paper attempts to analyze sukuk-associated risks and problems, and review their competitiveness in the capital market. In doing so, it compares sukuk with its conventional counterparts and conducts empirical analysis of the Value-at-Risk of both instruments in order to present potential sukuk investors with complete picture.
Analysing Bollinger Bands in Relation to Energy Spreads
(The British University in Dubai (BUiD), 2010-05) Breebaart, Jasper
This thesis examines the signalling ability of Bollinger Bands when analysed with energy spreads. The study evaluates the profitability of preliminary trading systems over different spread constructions to identify the Bollinger Band signalling efficiency. The test is thus an analysis of the weak form Efficient Market Hypothesis as proposed by Fama (1970). Earlier research has illustrated varied conclusions. The research into Bollinger Bands has illustrated that Bollinger Bands trading systems are unable to yield economic profits and perform worse than other Technical Analysis methods. The spread research, on the other hand, clearly identifies that there are inefficiencies and large potential for automated trading systems, also with Bollinger Bands or comparable methods. This study has found that Bollinger Bands generate inefficient signals, are not a good predictor of spread movements. On average the performance between 1995 and 2009 has generated a loss. On this basis a “contra mean reversing” (trending) approach of the highest loss giving settings has been deeper analysed to find considerable signalling efficiency, thus potential trading profits. The evaluation incorporates conventional energy spreads like the Crack and Frac spreads and created additional spreads. A created spread of the end products of the crack spread, heating oil and unleaded gasoline, generated the best results indicating the need for further research into this spread. The profitability of the contra Bollinger Band system indicates that the Efficient Market Hypothesis should be rejected in the weak form.
Financial literacy in the United Arab Emirates
(The British University in Dubai (BUiD), 2010-06) Al Hallami, Aysha Ahmed Sultan
This research examined financial literacy in the UAE. Financial illiteracy was known to be the main reason behind financial problems in many countries around the world. The research examined whether financial literacy has led to financial problems in Abu Dhabi and Al Ain, or not. This study surveyed 369 households in Abu Dhabi and Al Ain and determined their financial literacy level through short exam. The survey tested households’ demographic information, general financial behavior, saving behavior, debt behavior, and actual financial literacy scores. The findings suggest that 75% of households were classified in the low category of financial literacy scores based on the financial literacy exam. Relationships between financial literacy, saving behavior, and debt behavior were tested using CHI Square test of independence. Results showed that there is no relationship between financial literacy level and saving behavior, but there is a significant relationship between saving education and saving behavior. Moreover, no relationship was found between financial literacy level and debt behavior, yet a strong evidence of relationship was found between debt education and debt behavior. It was concluded that financial education on saving and debt have a great impact on Abu Dhabi and Al Ain households’ financial behavior.
Islamic Banking and Finance (IBF): Challenges of Putting Theory into Practice, and their Implications for the Long-Term Viability of IBF
(The British University in Dubai (BUiD), 2010-06) Ahmed, Yussuf Ali
Islamic banking and Finance (IBF) has been in existence for over two decades, and has seen it evolve into a formidable sector in the global financial system. However, this has not been without challenges, not least, winning acceptance in an environment where its basic concept run contrary to the established economic, social and political norms that were in existence for centuries. This study examines the effects of these challenges in shaping the theory of Islamic banking into what it is today and their implication for its long-term viability. Theory of IBF is compared to its practice today using the characteristics of its products and services, its stakeholders and other economic agents, based on theoretical deductions from already published academic materials. The result suggests that IBF is heavily influenced by economic, political and social realities, and is slowly converging to conventional banking and finance practices.
Comparative study of modern credit risk assessment methods
(The British University in Dubai (BUiD), 2011-01) Narzhanov, Yerzhan
The ability to predict bankruptcy is of great value for investors, lenders and other stakeholders of the companies. Moreover as it has been shown by the recent crisis originated in sub-prime market the financial distress can have multiplicative macroeconomic effect and bring high cost to economy of countries and the society. Thus there are various models to forecast failure of the firms which have been developed and proposed by academics in the recent years. This dissertation presents the basic framework and structure of four credit risk assessment models, namely (1) Merton's structural model, (2) KMV, (3) Z-score, and (4) Binominal approach. Then, work discusses limitations to practical usage of each model, and it also explains some necessary conditions before implementing these models. Real historical data was used to examine the effectiveness of each model in early bankruptcy forecasting. Financial variables of fourteen companies from four different industries were analyzed with two companies in the sample which eventually went bankrupt. The following industries are under consideration in this study − (1) banking, (2) automobile, (3) electronics, and (4) oil and gas sector. Back testing simulation was run on company's financial data collected for 3-5 years pre sub-prime crisis time horizon. On purpose, sample from each industry contains one company that has really defaulted in subsequent years. As a conclusion, work contains a discussion on results obtained to derive a conclusion on which risk assessment model(s) is (are) best in identifying pre-default companies.
Outperforming Emerging Market Securities Using Simple Technical Strategy (United Arab Emirates, Brazil, and Indonesian Stock Markets)
(The British University in Dubai (BUiD), 2011-04) Al-Ghafli, Mohammed Hussain Bin Mutlaq
The Dissertation made is to examine whether the technical analysis used in the emerging market can be profitable or not. Also if such way of analysis is proven successful, what is the proper way that such analysis should be used to gain the possible maximum profit and mostly avoid the downtrends and share depreciations? Within the thesis, we will view a strategy that have been putting to gather using simple moving averages to serve the need of proving the ability of technical indicators to beat the emerging markets leader securities. For measuring this strategy, we will view the result generated on the emerging markets securities of United Arab Emirates, Brazil, and Indonesia; and compare it with the results of the United States markets securities through by the daily trading observations. With the results given to proof the objectives required, we will also examine the limitation of such strategy used.
Tracking Error in Index Funds
(The British University in Dubai (BUiD), 2011-04) Hasan, Abdel Salam Abu
The present research investigates the tracking error in UAE index funds and explores the tracking error related models. Five tracking models were used and divided into two major types. The first type is the Quadratic tracking Error Model which extensively studied by (Roll, 1992) and included one model. The second type is the Mean Absolute Deviation Tracking Error Models and covers four models. Mean Absolute Deviation Tracking Error Model is following linear programming methods (Rudolf, Hurgen, & Heinz, 1999). The empirical data were collected from Emirates Securities Market (ESM). Four major funds have been studied and analyzed. Tracking error models have been implemented on the funds using the historical net asset values (NAVs). Each model has been implemented separately on each fund to investigate the effect on the percentage of the differences between the fund’s returns and benchmark’s returns.
revisiting credit risk assessment of SMEs
(The British University in Dubai (BUiD), 2011-04) Serov, Vasiliy
With credit decisions being defined as increasingly important and crucial decisions in today’s business environment, affecting entire life-span of a business, failure results in high costs for firms, society and economy in general. We, thus, see evaluation of business failure as emerged scientific field seeking optimal prediction models, depending on specific characteristics of the firms studied. The main job of a credit analyst is to determine risk relative to the portfolio one is analyzing. In such analysis quantitative factors are vital variables as they allow an expert to say whether a company with a certain, say, leverage ratio, is risky or not. Credit analysts of public large corporates are availed with sophisticated tools of measuring associated credit risk of their borrowers, which allows them to efficiently summarize substantial size of the analytical data, like financials, into standardized condensed number, probability or rating, that would rank a corporate effectively along the ladder of associated default probability and allow analyst to focus his expertise more productively and apply the subjective, expertise-driven, analysis to produce a verdict where it is needed the most. Middle market lending, however, is still primarily a subjective process. No universal and objective benchmarks are existent up-to-date that could be applied across all Small and Medium Enterprises (SMEs) effectively and would allow their loans to be securitized. As market value information is valuable and not reflected in financials, private firms default models are sub-optimal to those companies with traded equity (Falkenstein, Boral, & Carty, RiskCalc(TM) For Private Companies: Moody's Default Model, 2000). After many years of research, there is no universally accepted model for predicting probability of default (PD) for SMEs, based on causal specification of underlying economic factors. This contributes significantly to the financing gap that the SME sector is faced with. Lack of credit to this sector persists heavily despite the fact that SMEs are a major contributor to economy’s output and development. Importance of making an accurate judgment about counterparty’s PD is high especially for financial institutions, like banks, whose margins on net cash flow are so narrow and their leverage is so high that small differences in actual and estimated assets’ quality may affect their solvency substantially and, hence, solvency of financial sector of economy as a whole. The lack of precise methods in measuring of credit risk results into numerous problems for lenders: (i) high unexpected losses, (ii) high cost of credit applications review, (iii) frequently credit decision-making is separated from collection function, while the feedback from the latter is vital for development of judgmental skills in people who approve credit applications, (iv) lack of experienced personnel and due to lack of specific methods, personnel is hard to train. Each loan that is mispriced or mistakenly granted represents a lost opportunity. Hence, importance of better credit analysis should not be underestimated. In light of the above, this study tries to focus on specifics of credit risk analysis of SMEs and discuss how the approach should be modified to incorporate these unique features of smaller companies.
ERM practices in Non-Financial Institutions in UAE
(The British University in Dubai (BUiD), 2011-04) Kumar, Seema
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. Many organizations have implemented ERM programs, consulting firms have established specialized ERM units, and universities have developed ERM-related courses and research centres. Despite the heightened interest in ERM by academics and practitioners, there is an absence of empirical evidence regarding the impact of such programs on firm value. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on UAE corporate. This research studies the ERM framework of UAE firms with the help of a survey that was answered by the Risk Managers of various corporate. The research gives information regarding the ERM processes in these firms and the various methods and tools used for the process. The research provides in depth study of ERM process in UAE and helps in assessing the efficiency of the programme.
International portfolio diversification from Russian investor viewpoint
(The British University in Dubai (BUiD), 2011-04) WIPPEL, KSENIA
As 1998 crisis consequence in Russian Federation, most of Russians lost confidence in investment products. Moreover, it made Russians reluctant to invest in the capital markets, they preferred to keep savings in bank deposits. In 2005, a share of 55.5% of Russian savings was deposited to bank accounts, 30.5% kept in cash, only 14% invested into the capital markets. The abundant liquidity was not efficiently utilised. This paper determines whether it is better for Russians to invest domestically or internationally. This paper analyzes how risks influence an investment portfolio of stocks representing developed and emerging markets. Portfolio comprises five developed markets. Analysis covers returns statistics, correlation matrices and efficient frontier of 14 sets of varying indices weightings. This gives comparison between domestic only portfolio (exemplified in emerging markets), international portfolio (exemplified in developed markets), internationally diversified portfolio (emerging and developed markets). Comparison findings were based on literature reviews of international portfolio diversification, emerging markets and exclusively for the first time the Russian capital market. Reviews indicated that international portfolio diversification from a Russian investor point of view is an untapped area. This paper demonstrates how to maximize gains at a given level of risk and unveil opportunities for converting foreign exchange risks into potential gains.
An analysis of the Practice and Standard of Corporate Governance in the UAE Banking Industry
(The British University in Dubai (BUiD), 2012) Al Moosawi, Hassan
The global economic crisis of 2008, partly triggered by the lack of stringent management oversight of large financial institutions has raised regulatory alarms around the world. To address the challenges arising out of this global crisis a number of proposals to improve bank corporate governance have been put forward by international organizations. Against this backdrop this study is set, to critically study and evaluate corporate governance in a UAE bank. As part of the study thorough literature review will be conducted to study the Corporate Governance policies and practices adopted by banks in general and furthermore best practices in Corporate Governance in the banking industry will be reviewed. The data for this study is collected from both primary and secondary sources. Primary data will be collected through a questionnaire survey. The questions included in the survey were designed based on the BASEL Corporate Governance Guidelines as well as the surveys conducted by OECD MENA. Secondary data is collected from various finance journals, online library resources, the internet, books and the internal documents of the bank. The findings of the survey will be tabulated and analysed. A detailed discussion will be presented along with a set of recommendations that if applied will further improve corporate governance in the UAE banking industry.
Impact of the Global Financial Crisis on GCC- UAE's Banking Sector
(The British University in Dubai (BUiD), 2012-02) Jaber, Hoda
The rationale behind this paper is to inspect the impact of the global financial crisis on GCC countries, UAE in particular & its banking sector. To assess the extent of that effect, this paper provides some comparison before & after the crises. Additionally, it examines the challenges & recommendations. Whilst for various GCC the effects of the crisis have been considered to be mild compared to the rest of the world, its impact had been ruthless in some countries, including UAE. A lot of GCC countries have made an gigantic effort in strengthening their policy frameworks and sturdiness, thought-provoking a healthy economic growth, improving the sovereign wealth fund, foreign reserve, financial systems, and the account balance. But a lot are still considered being highly susceptible to a deep global downturn that is so very well linked to oil prices. This paper provides policy advice on how best to address the impact of the crisis on GCC countries, UAE banking sector specifically, and describes suitable measures & policies that should be adopted. It is crucial to set up managed financing facilities to help out sms's, the real-estate sector, the bank operations and industrial sectors, while making efforts to maintain and catalyze additional
State of Global Financial Crime In-depth Analysis on GCC Countries
(The British University in Dubai (BUiD), 2012-03) Odeh, Layan Mazen
Financial crime has been present ever since business and trade have started; however, the issue of financial crime was only dealt with ex post facto. In the last few years, particularly after the 2007 global economic crisis, finding the connection between white-collar crime and economic crises became the primary focus of many corporations and legal entities. This research paper shows how financial crime contributed to the global financial crisis, consolidates the global state of financial crime in the last 5 years (2007-2011), presents an analysis on corruption and explains the laws created and/or modified by governments to mitigate the risk of financial crime. Research has shown that financial delinquency is more common in developing countries than developed ones; therefore, this research paper delves into the state of financial crime in the GCC markets by presenting the largest incidents of fraud that occurred and governments’ actions to combat it. The research method used was qualitative case study research; the data used was qualitative secondary data and was analyzed using content analysis. The paper finds that financial crime was one of the factors that caused the 2007 global economic crisis, financial crime incidents were aggravated in some sectors and countries after the crisis but decreased in others, and most importantly, it is the discovery of crime that increased the most during economic turmoil. The paper also concludes that corruption and bribery are increasing in many countries, regulators are paying attention to the issue of corruption but corporations are not. Lastly, GCC countries are still on their early stages in combating financial crime, however, they are employing effective tools and measures, which put them on the right direction.
Macroeconomic Conditions and Soundness of UAE Banking Sector
(The British University in Dubai (BUiD), 2012-04) Ali, Dhuha Musleh Fadhel
Using a panel data for 19 UAE national banks covering the period 2005-2010, this research analyzes the impact of selected macroeconomic and bank-specific variables on financial soundness indicators (FSIs) related to banks. Capital adequacy, Assets quality and profitability are key indicators for banks’ soundness and they are believed to have a robust correlation with business cycle and other macroeconomic indicators. The study finds that banks’ FSIs are strongly related to the business cycle and inflation rate. Banks tend to increase their capital ratios in downturns while reducing them in upturns causing a pro-cyclical effect on the business cycle. Also, inflation rate has a strong negative relationship with capital ratios due to its impact on banks’ costs and profitability. Probability of default tends to increase during adverse macroeconomic conditions and thus increases non-performing loans in the banking sector. Moreover, some bank-specific characteristics showed significant relationship with soundness indicators of banks. Cost of adjusting capital and risk appetite of banks have significant impact on the CAR ratios. Also, higher spread between lending rate and deposit rate increases the debt servicing burden on borrowers and thus increases the probability of default, while banks with lower leverage ratios can be more profitable due to their low cost of funding.
An application of Data Envelopment Analysis to study the Technical Efficiency of UAE banks in the pre and post crisis period
(The British University in Dubai (BUiD), 2012-04) Siddiqui, Huma Anjum
The rapid growth and development of the UAE banking sector over the past decade has seen increased competitiveness, technological advancements, booming economic conditions as well as a global financial meltdown resulting in tighter regulatory norms and increased emphasis on operational efficiency. To this end, the present paper carries out a two stage analysis on 11 local commercial UAE banks, over the period of ‘2003-‘2010. In the first stage, the technical efficiency scores of the sample banks are computed with the help of the output oriented, variable returns to scale, Data Envelopment Analysis technique. The scores so arrived at in the first stage, were used in the second stage of the analysis, where the Tobit censored regression test was used to regress the dependent variables (the efficiency scores) against 4 selected variables, so as to understand whether these variables influence efficiency scores and if so, to what extent. The findings indicated that the UAE banking sector was affected by the financial crisis based on the pre crisis (i.e. ‘2003-‘2008) technical efficiency scores which reflected an ascending trend. Thereafter, a decline of 33.33% in the number of technically efficient banks was observed and it was inferred that DEA as a technique was able to reflect this trend. The results of the second stage analysis showed that the size of a bank, the profitability (in terms of net income) and the market share of each bank positively influenced the technical efficiency scores, where an increase in these independent variables led to improved efficiency scores. On the other hand, total equity (the proxy for bank capitalization) was found to be negatively related to efficiency scores, which meant banks with lower capitalization ratios had better efficiency levels and vice versa.

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