Changes in Gulf banking industry after global financial crisis - Research Paper Example

?Changes in banking in the Gulf area since the Financial Crisis Table of Contents Introduction 3 Financial and economic condition of the gulf region 3 Islamic banking in the contemporary finance world 4 Changes in Gulf banking industry after global financial crisis 5 Technological changes 5 Changes in training and development 5 Changes in corporate governance 6 Conclusion 6 Reference List 8 Introduction The financial crisis of 2007- 2008 has cast major impact on the global economy. However, some regions of the world have been affected more than the others. The gulf countries are one of these regions that have been worst affected by the global economic and financial crisis. Therefore, the banking and finance industry of these countries have undergone phases of major changes during and after the period of crisis. Such changes in the methods of Islamic banking and commercial banking have been the subject of interest of many researchers in recent years (Thanassoulis, 2001). Financial and economic condition of the gulf region There is general a perception of common population that the gulf countries own huge wealth owing to their massive oil reserves and these countries possess ample quantity of foreign exchange to sail through financially or economically hard times. This makes people imagine that banking system of the gulf region does not get exposed to the adversities of changes occurring in the financial system of the international economy. For these people it is a surprising fact that the gulf banking system has faced some of the severe impacts of the financial downturn. Research shows that the Gulf region consists of not only rich countries, but also economically poor countries that have high dependence on the international markets (Xiao, 2009). These countries also face demographic pressures that affect the economic functioning of the economies. They have been financially affected due to lack of “effective regional integration and well-functioning social safety nets” (Drine, 2010). The Gulf area can be classified into three regions. The first region consists of countries in which the main economic activity is oil production. These are the oil rich countries. The second group of countries are more diversified and not as oil rich as the first group. These economies experience some degree of vulnerability in the international market. The third segment of countries in the gulf region consists of the countries that have high demographic pressure, low functioning social safety nets and low levels of economic growth (Sharif, 2006). Social and economic crises within these countries have hindered their economic growth and they have been exposed to the rages of financial crisis. There are fewer countries in the third group than in the first and groups, but these countries are worse affected during the financial crisis. The countries in the third group include Sudan, Mauritania, Yemen, Djibouti, Comoros and Somalia. These countries received very little international support during and even after the crisis ended. Hence, the governments of these countries have been serious measures to improve the banking and financial systems in their own countries. Islamic banking in the contemporary finance world The banking industry in the gulf region has passed through a period of major improvements over the period of last five years. Over the years, Islamic banking industry has matured and has become a viable competitor of the conventional commercial banks operating in the Middle East as well as in the South East Asian countries (Koldertsova, 2010). At the global level, the banking system of the gulf region has increased in importance. The Middle East acts as the core launch pad for the promotion of the system of Islamic banking in the Western financial markets and business culture. The following section has been devoted to the study of the changes that have taken place in the banking industry in the gulf region after the global financial crisis. Changes in Gulf banking industry after global financial crisis Technological changes Some of the basic factors that have contributed to the successful reforms of Islamic banking and finance industry are hike in oil prices in the global market, advancements in information technology, product innovation, sophistication of management systems and “increasingly receptive attitude of conventional regulators” (Khan and Bhatti, 2008, p. 710). Advancements in information technology act as catalyst to the banking system in the area, which has helped this pattern of banking a part of the global banking and finance industry. Success of this banking lies in the fact it has won over a majority of population that belong to the Muslim faith (Khan and Bhatti, 2008). As the banking sector has integrated modern technology into their systems, the process of communications has improved. Lenders and borrowers can now interact with one another directly, which improves the process of transaction by increasing transparency. Changes in training and development The global financial crisis of 2007 has highlighted the importance of sound practices of corporate management in the financial institutions. It would ensure the stability of the capital markets. Stability of financial institutions affects the stability of the capital markets. After the effect of crisis started to decline, continuous focus has been maintained on the position of corporate governance and the characteristics or conditions that favor or hinder its development. Recent research suggests that inefficient corporate governance reduces effectiveness of the management systems and leads to poor performance by the institution and creates dissatisfaction among the stakeholders of the organization (Sulaiman, 2001). In the two decades prior to when the financial crisis hit the world, there was high economic growth in the Gulf countries. Prosperity was the result of huge exploitation of oil reserves in these countries, which created opportunities for making new investments. Higher income led to higher levels of savings as a result of flow of funds across the banking system and financial corporations. Subsequently, demand for loans by the investors increased significantly. Academicians and policy makers claim that poor level of corporate governance has been the primary reason behind the fall of the financial institutions in Sudan, Yemen and Somalia (Baydoun et al., 2013). Changes in corporate governance Besides corporate governance, management of the culture and language used for communication within the organization plays a very important role in the success of the institutions in the long run (Solomon, 2007). After the banking industry faced the effects of financial crisis, several research works were made on the influence of language and culture of the organizations. Research results reveal that in the gulf countries, most banking organizations and financial institutions depend greatly on expatriate labor (Wilkins, 2001). Due to difference of the nationality of the laborers, there exists a language gap between the management and the employees or among the co workers. Often, cultural environment of the organization is affected by the level of training and development of the workers. After 2008, policy makers in the financial institutions have put more importance on the training and development of the employees (Shoebridge, 2009). Conclusion The effects of the financial crisis have to be considered by the policy makers while making plans for the future and improving the management systems internal to the organizations. It is important that banking and financial sector of the gulf economies have to be transformed and integrated in to the main stream financial system of the globe. It is, therefore important that the challenges in these economies are identified and the future prospects are determined with reference to the resources available to the economies for dealing with the challenges. In this regard, past experiences regarding failure of the banking industry have to be truly accounted for. The system of Islamic banking has spread from the gulf region and entered the practice of banking of the other developed countries in the world, such as Australia, the United Kingdom, the United States of America and Canada (Venardos, 2006). After the financial crisis, this system has become more concerned about the ethical values of financial transactions and has simultaneously increased its flexibility; so as to compete with the conventional interest based financial system. As a whole, the banking and finance industry in the gulf region has undergone certain developments and has become an exemplary finance practice in the global market (Khan and Bhatti, 2008). Reference List Baydoun, N., Maguire, W., Ryan, N. and Willett, R., 2013. Corporate governance in five Arabian Gulf countries. Managerial Auditing Journal, 28 (1), pp. 7-22. Drine, I., 2010. Impact of the Global Economic Crisis on the Arab Region. [online] Available at: < http://www.wider.unu.edu/publications/newsletter/articles/en_GB/05-06-2009/ > [Accessed 18 September 2013]. Khan, M. M. and Bhatti, M. I., 2008. Islamic banking and finance: On its way to globalization. Managerial Finance, 34 (10), pp. 708-725. Koldertsova, A., 2010. The second corporate governance wave in the Middle East and North Africa. OECD Journal: Financial Market Trends, 2010 (2), pp. 1-8. Sharif, Z. M., 2006. Islamic finance in Australia. Islamic Finance News, 3 (14), pp. 11-12. Shoebridge, N., 2009. This is the crisis for giving. Business Review Weekly, 31 (7), p. 49. Solomon, J., 2007. Corporate governance and accountability. New Jersey: John Wiley & Sons. Sulaiman, M., 2001. Testing a model of Islamic corporate financial reports: some experimental evidence. IIUM Journal of Economics and Management, 9 (2), pp. 115-39. Thanassoulis, E., 2001. Introduction to the Theory and application of data envelopment analysis: A foundation text with integrated software. Massachusetts: Kluwer Academic Publisher. Venardos, A., 2006. Banking in Singapore. Islamic Finance News, 3 (42), pp. 10-12. Wilkins, S., 2001. Management development in the Arab Gulf States – The influence of language and culture. Industrial and Commercial Training, 33 (7), pp. 260-265. Xiao, Y., 2009. French Banks amid the Global Financial Crisis, IMF Working Paper, WP/09/201. Read More