Commercial Bank of Dubai in the United Arab Emirates - Research Paper Example

 Commercial Bank of Dubai in United Arab Emirates Introduction Commercial Bank of Dubai (CBD) is a public shareholding company, formed in the year 1969. The bank was formed as a joint venture initiative of Commerzbank, Commercial Bank of Kuwait and Chase Manhattan Bank. By 1982, the bank had grown as a ‘National Public Shareholding Company’. Over a few decades, it has successfully increased its capital base and converted as an advanced modern banking establishment. Commercial Bank of Dubai (CBD) has strong financial base and steady management system. Over the years, the bank has effectively served the customers as well as other stakeholders (Commercial Bank of Dubai, 2011). Financial Performance Commercial Bank of Dubai has successfully made its position in the banking industry by effective performance. It is rated among top ten banks of United Arab Emirates (UAE) with respect to market capitalization, lucrativeness and proficiency. In the year 2009, the net profit of the bank was almost 803 million AED which was 4.1% more as compared to the year 2008. The total operating profit had also increased by 3.6% to 1.2 billion AED. The total asset of CBD was recoded as 36.7 billion USD in the end of 2009 which was 2.9% more compared to previous year. The balance sheet of CBD shows strong financial performance for last few years and the growth rate was at par with the industry standards. Despite the market slowdown due to global financial issues, CBD has developed several new initiatives to maintain its position in the consumer market (Commercial Bank of Dubai, 2009). Benchmark against Industry In the 6th annual benchmarking of the banking industry in the year 2010, it has been observed that there was significant improvement in the overall performance of customer service. Current economy is going through several uncertain occurrences due to financial crisis, and thus banks in UAE had added much concentration on debt retrieval, reduction of operational expenses and enhancement of profit margins. In the benchmarking, Commercial Bank of Dubai had increased its position as well as performance in almost every banking area (Ethos Consultancy, 2010). In the 7th annual benchmarking of banks in 2011, by “Ethos Consultancy”, CBD has secured top position with respect of providing best performance in web service (Zawya, 2011). Major Changes in Past/Foreseeable Future Since the establishment, CBD has gone through several changes by delivering high quality lending and financial solutions. In the year 1969, CBD had only one branch with 10 employees and today it has almost 28 branches, 169 ATMs and 43 Cheque deposit machines throughout UAE. At present, CBD provides employment to almost 1,150 staffs. CBD has intensely developed the banking structure by implementing modern equipments, systems and machineries. In future, the company is expected to enlarge its marketing base in UAE by initiating new offices and updating the existing branches. From the initiation phase, CBD has increased its service offerings. It has refined the long-term strategies and launched several innovative services such as e-channels, online bill payment and loyalty schemes among others to satisfy the customers. In the future, CBD seeks to compete in the banking industry in order to fulfill the prospects of customers such as providing higher interest on savings, pioneering services, easier account access and better technology (Superbrands, 2011). Analysis of Commercial Bank of Dubai The financial year 2009 was quite challenging for CBD as economic recession was at its peak and major banks in Dubai had taken sweeping measures to cope up with the crisis. The banking system of UAE had flourished in overpowering the inferences of global financial crisis with unswerving governmental support from the ministry of finance and central bank through delivering liquidity services, assuring deposits, and flexibility transactions. Furthermore, a sequence of programs and events were applied with close concentration on loan assortments, banks’ expenses and strengthening of banks’ monetary position because they play significant part in supporting the economic development of UAE (Commercial Bank of Dubai, 2009). Marketing Performance CBD had conducted numerous marketing and promotional operations directed at augmenting its status as a leading bank in Dubai. In the year 2009, CBD was dynamically drawn in public relation schemes by funding several social, ethnic, and sporting events, for example “Save Water Conference”, “Dubai Festival for Youth Theater”, “Blood Donation Campaign” among others as a part of marketing promotion. It had also granted support to several charities and educational institutions throughout 2009 (Commercial Bank of Dubai, 2009). Financial Performance CBD concentrates on its core businesses i.e. lending, trade finance, short and medium run loan for working capital and funding for fixed asset. Despite economic slowdown, CBD had launched several new product advantages in order to secure its position in the financial market. One significant financial product introduced by CBD was Unit Time Deposit (UTD) which provides supreme flexibility to the customers who desire to exploit the money located in time deposit scheme. Besides, it has also offered unique Royal and Platinum packages for valuable customers so that they become loyal towards CBD (Commercial Bank of Dubai, 2009). The operating profit of CBD had increased by 119% from 2005 to 2009. In 2005, the operating profit was almost 561 million AED which had turned out to be 1,233 million AED. The amount of customers’ deposits also increased significantly. In 2005, it was almost 10.63 million AED which had become 27.92 million AED by 2009 having 162% rise than 2005. The share capital of CBD had also shown upward trend during the economic crisis. In the year 2009, the amount of share capital had increased from 1411 million AED of 2008 to 1764 million AED in 2009 (Commercial Bank of Dubai, 2009). Management Performance CBD had used Porter’s differentiation strategy in order to enhance its marketing performance. For instance, “Islamic Credit Cards” for satisfying the requirements for Sharia compliant credit cards had been a success. In addition to it, CBD had instigated relocation of its whole credit card base from ‘magnetic stripe cards’ to ‘chip enabled cards’ so that it can successfully prevent the fraudulent activities in the banking system. CBD had increased its customer management through improved customer service so that the clients remain happy and satisfied towards the services of the company. The other management activity of CBD was streamlining and centralizing the banking operations which had helped CBD to increase its customer base. Reforming the significant operational procedures also has helped in creating high-level of collaboration with customers and quicker service delivery (Commercial Bank of Dubai, 2009). Accounting Performance The accounts of CBD such as financial statements and balance sheet among others are conducted by proper accounting strategies so that they are free from any mistakes or errors. In order to certify increased accounting performance, CBD had developed controls which comprise thorough measures for confirmation and appraisal of accounting as well as financial releases. The financial reports of CBD are bound by periodical appraisal by external auditors to ensure fair performance (Commercial Bank of Dubai, 2009). Recommendations CBD can increase its customer base by providing financial support to the poor people that can help to develop the economy and also reduce the poverty. The business of CBD has high potential for expanding in other developed as well as developing countries. The economy of UAE is growing but it is still incomplete with respect to financial coverage. CBD needs to research and develop new financial products which can help to differentiate it from other competitors. In order to manage the economic fluctuations, CBD should cautiously understand the risk of lending and manage it through implementing appropriate model and from time to time there is need for restructuring the existing model to adjust with global economic situation. Forecasting of Demand/Supply of the Banks’ Products/Services Impact of Economic Factors on Banking Performance Several economic factors such as international trend and inflation rate among others impact on the performance of banks. Macroeconomic influences denote the variables peculiar to the lending industry such as size of bank, bank capitalization, insurance, capital ratios, and endowment for losses. On the other hand macroeconomic factors refer to the nation-wide variables, financial variables, supply and demand of money, interest rates, economic development, inflation rate, currency conversion rate and stock market index among others. These microeconomic determinants can impact on the lending of banks. The economic growth and enhanced industrial development encourage the demand for medium as well as long-term loans. From the research on association between microeconomic variable and long-term loan in China during 1994 – 2005, it has been observed that, low degree of inflation has positive influence on the medium and long-term loan, although high degree of inflation has adverse effect on medium and long-term loan (Christopher & Bamidele, 2009). The following table will show the long and short run reaction of macroeconomic instability on the lending of banks: Macroeconomic Volatility Indicators Time Dynamics Supply of Money Money Conversion Rate Inflation Short Run Positive; insignificant Negative; insignificant Positive; insignificant Long Run Negative; significant Positive; significant Negative; significant Source: (Christopher & Bamidele, 2009). Long run increase of money supply and inflation can encourage banks to decrease the lending amount while devaluation in money conversion rate (AED/USD) inspires banks to lend more. 1% fall in the instability of money supply is directly related with 0.40% surge in bank lending, similarly 1% rise in inflation results in 0.04% drop in bank lending (Christopher & Bamidele, 2009). Underlying Models of UAE Banks Islamic financial system derives its strength from its underlying models of operating business. The Arab countries emphasize for their industry focused tactic to Islamic finance as contrast to high reliance on a regulator controlled model. Unlike other banking models, the Islamic banking models are highly regulated and supervised just like the customary banks or conservative prudential supervisory outlines. Therefore, it can be observed that majority of banks in UAE which had applied Islamic models were quite invulnerable in the current financial recession. The reason is that Islamic banking models did not have acquaintance to subprime or credit avoidances sanctuaries and return on ‘Sharia compliant equity funds’ were quite established and at times better than conventional counterparts (Nasr, 2011). Forecasting of Change in Demand and Supply of Bank’s Products/Services The economy of UAE had shown remarkable accomplishments in recent years by creating a sustainable economic development. The capitalization of banking system in UAE remains comprehensive after the impact of economic crisis and the Capital Adequacy Ratio (CAR) was almost 21% in 2010. It is forecasted that Dubai will remain strong by serving major elements of financial development in forthcoming days. Furthermore, through the authorization of 25 million USD arrears reform by the creditors in the year 2011, Dubai has successfully reestablished the confidence of investors. It is predicted that inflation rate will increase in upcoming days but stay within single digit. Therefore, the domestic demand of banks’ lending is expected to recover and improve (Menafn, 2011). The relation of UAE’s currency with the USA’s currency leaves restricted possibilities for central bank of UAE to control the inflation rate and manage the supply of money in the nation. Therefore, to a certain degree, the progress of money supply in UAE is accomplished by aligning national interest rates with the trend of interest rate in the USA. The growth of banks’ mortgage loan was hindered in the period of 2009–2010 because of reduction in demand of banks’ products, lesser risk enthusiasm among investors and challenging financial conditions. But currently, the credit situation is strong in UAE and has displayed slight development. Also, in spite of economic downturn in the development of mortgage loaning of banks, the real estate lending had reached 44.4 billion USD by the end of 2010 which indicates ongoing recovery in the property market and investor sloppiness. The deposits in the banks of UAE have also increased. The amount of deposits rose almost each month from 2009 and by 2010 it had surpassed 1.05 trillion AED. It indicates that the banking services in UAE have high demand and prospects (Menafn, 2011). On the other hand, the loans and the advances had stayed tight. The total credit had amplified by only 1.4% in 2010 to 972.1 billion AED. It clearly demonstrates the increased consciousness of banks in lending as financial atmosphere is becoming more challenging. The loan to bank deposit ratio had shown increased growth of 101.3% in the year 2008 and 92.6% in the year 2010 which designates that the banks are successfully dropping the loan to deposit ratio under the upper limit of central bank i.e. 100% (Menafn, 2011). The following graph will show the changes in total deposits, loans and advances and loans to deposit ratio of UAE banks from 2006–2010: Source: (Menafn, 2011). Findings and Conclusions The prospect for CBD is brighter and has higher potential for growth in upcoming days. The economic crisis has threatened the banking industry all over the world for a substantial period. But by analyzing the performance of CBD and economy of UAE, it can be observed that majority of banks have successfully managed to cope up with the economic crisis and have required less support from the government. The banks of Dubai along with the entire UAE had faced less insolvency and liquidity risks compared to other counterparts. The year 2008–2009 was much difficult for CBD due to certain drop in stock market prices. The economic system in UAE is based on strong ethical and decent structure and the banks are much concerned with legal as well as moral and virtuous aspects (Amran, n.d.). With respect to managerial, marketing, financial and accounting perspectives, CBD had shown quite effective performances and maintained its position in the financial market. It has also improved the operational capabilities with multiple advancements in organizational infrastructures. Though there are stresses on the organization of several microeconomic factors, through appropriate innovation in products and services, CBD can increase its business and develop a strong customer base. References Amran, M. N. A. (n.d.). Prospects for Islamic banking after the world economic crisis. Retrieved from http://www5.cuhk.edu.hk/wylf/wylf_media/paper_poster/Economic_07_Muhamad_Nur_Adzim_AMRAN.pdf Christopher, S. R. O., & Bamidele, I. (2009). The impact of macroeconomic instability on the banking sector lending behavior in Nigeria. Journal of Money, Investment and Banking, 7, pp. 88-100. Commercial Bank of Dubai. (2009). Annual report 2009. Retrieved from http://www.cbd.ae/cbd/PDF/AnnualReport2009.pdf Commercial Bank of Dubai. (2011). Bank profile. Retrieved from http://www.cbd.ae/cbd/about_profile.aspx Ethos Consultancy. (2010). 6th annual bank benchmarking index reveals marginal improvement in customer service. Retrieved from http://www.ethos.ae/2010/10/6th-annual-bank-benchmarking-index-reveals-marginal-improvement-in-customer-service/ Menafn. (2011). United Arab Emirates (UAE) economic brief and outlook 2011. Retrieved from http://www.menafn.com/updates/research_center/UAE/Economic/kamco130411.pdf Nasr, S. (2011). Islamic finance in the Arab world: challenges and prospects. Retrieved from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&sqi=2&ved=0CD0QFjAE&url=http%3A%2F%2Fgcbe.us%2F2011_CBEC%2Fdata%2FSahar%2520Nasr.doc&ei=HLruTru9KYXmrAeb8rXyCA&usg=AFQjCNE9DvZykUbEDNTcYGd1Ewi7RMZc0A&sig2=6cPIniyHPzfuD3OdX3Zpew Superbrands. (2011). Commercial bank of Dubai. Retrieved from http://www.uae.superbrandsmena.com/images/Spreads/Superbrands%20UAE%20Vol.VII%20-%2011.pdf Zawya. (2011). 7th annual bank benchmarking index reveals less than 50% of UAE banks have customer service as a core focus. 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