Banking and the Political Situation in Bahrain - Research Paper Example

Banking and the Political Situation in Bahrain Table of Contents Table of Contents 2 Introduction 3 2. Literature Review 7 3. Methodology 14 References 21 1. Introduction Context Bahrain is located in the central position amid countries of the Persian Gulf. It is mainly dependent for its growth as well as development on trade and political stability. The political and social reforms are formulated through the ‘National Action Charter’ with the intention of sustainable growth and diversification of the banking sector. The rising issue of increased political pressure and financial crisis are affecting the business operations of financial sector of Bahrain (Shachmurove, 2003). Bahrain is also observed to be the largest financial centre among the ‘Gulf Cooperation Council’ (GCC). The GCC countries are majorly dependent on oil exports on a fixed exchange rate. In the GCC region, the banking sector is considered to be the main dominating player in financial terms. In this respect, the Islamic banks are perceived to be growing in an immense manner and are determined to be the ultimate foundation for financial transactions amid the gulf countries. The banking sector of Bahrain is recognised to be accountable to be the major contributor of ‘Gross Domestic Products (GDP) growth. Bahrain is identified to be acquiring around 80% of the GDP in relation to investment funds. The main objective of Bahrain is to obtain the leading position as a financial hub (INSEAD, 2011; Al-Hassan & et. al., 2010). BNP Paribas is recognised as among the leading banking institutions which is one of the leading financial service providers in the European regions. The bank is identified to be present in around 80 countries. Moreover, the bank employs about 200,000 individuals on a global context. BNP offers three major services which include retail banking, ‘corporate and investment banking’ as well as investment solutions (Bahrain Economic Development Board, 2008). Al Salam Bank-Bahrain (B.S.C) began its business operations in the year 2006 and the bank is located in Bahrain. It is observed to be performing business operations in a differentiation manner for acquiring huge capital and proficient as well as experienced management team. The bank adopts standards and principles which are recognised at international level for its transparency as well as integrity (Al Salam Bank Bahrain, 2012). Topic to Be Addressed The subject of the proposed research study is to determine the impact of adverse political and financial conditions on the banking sector in Bahrain. Moreover, the proposed research study will assist in ascertaining the importance of stable political conditions for businesses to perform their operations effectively. Project Background In Bahrain, BNP Paribas is recognised to be the principal foreign bank. The bank has established two offices in Dubai with the objective of defending itself from unstable political scenarios and financial crisis. The proposed research study will be based on the analysing the factors which are seemingly affecting the operations as well as competitiveness of the banking sector in Bahrain. In this regard, the impact of unstable political situations and financial crisis of the banking sector of Bahrain will be studied in order to improve their situations. Justification of the Topic Chosen In relation to the present day context, it has been observed that the political condition of a country is significantly affecting the economic as well as business environment. Moreover, there are other specific external factors which are demonstrated to be impacting a country’s political and economic conditions both positively as well as negatively. In this regard, the major problem which has been recognised in this proposed study is changes in the political conditions affecting the financial sector in Bahrain. This problem is also identified to be hampering the competitiveness of its financial sector on a global context. Research Question On the basis of identification of the research problem, the research question for the proposed study will be “How has the recent political changes in Bahrain impacted the banking sector and the competitive advantage of Bahrain’s Financial Hub within Porter’s five forces framework?” Aims and Objectives of the Research Study The aims as well as objectives of the research study will be to determine the impact of the political factor which is seemed to be affecting the performance of financial sector in Bahrain. Moreover, the study will recognise the impact of financial crisis towards political conditions which in return affects the banking sector. A literature review will be conducted with the intention of determining the changes which are incorporated by banks for the adverse political conditions among nations. Furthermore, these changes will be observed to alter the management practices in the banking sector. The research study will also conduct a ‘Porter’s five forces’ framework with the intention of ascertaining the competitive position of Financial Hub in Bahrain. Potential Contributions and Potential Research Problems/ Constraints The proposed research study will contribute in determining the impact of political conditions and financial crisis amid the banking sector in Bahrain. Moreover, the study will also assist in identifying the changes which have occurred in the banking sector in relation to their operations. The proposed research study is broad in nature which may create certain limitations for the study. The secondary data to be collected may not be updated. The banking officials may be reluctant in responding to the questionnaire survey. These potential limitations might create certain difficulties for the proposed study. 2. Literature Review Political Risk In relation to present ever-changing global business context, it has been apparently recognised that companies are increasingly being affected due to unstable political environment. In a global context, companies are perceived to be under the persuasion of political interference (Advisen Ltd., 2013). A report published by Advisen Ltd. (2013) signified that political factor is the rising problem or threat among corporate sector. The financial sectors of countries are recognised to be the major ones which are affected due to this factor. Political risk is perceived to be a major problem amid organisations which are operating on a global context with assets on foreign countries which include investment firms and banking sector. The article of Advisen Ltd. (2013) further implied that political unrest as well as instability of the political factor is identified to be a real issue in developing countries. Political risk was considered as a threat before but now this factor is determined to be a reality among countries and companies. Moreover, there are other factors such as financial crisis and change of government among others which are observed to be influencing the political condition of a country (Advisen Ltd., 2013). In the similar perspective, the report of ‘Multilateral Investment Guarantee Agency’ (2011) demarcated that political risk is determined to be a factor which can lead to disruption in business operations of companies. The multinational corporations (MNCs) are demonstrated to be the ones which are majorly affected by unstable political scenarios. The business operations MNCs are impacted with the political risk factor both at home and host countries. MNCs in their home countries can be affected by political risk in relation to policies and reforms formulated restricting outward investments. On the other hand, the political risk associated with the host countries where the MNCs are operational may be affected with changed policies or regulations of government or political parties (Multilateral Investment Guarantee Agency, 2011; Dabbeeru, 2010). The report of ‘Multilateral Investment Guarantee Agency’ (2011) also conveyed the message that political risk is identified to be a violation of agreement by governments, imposing limit on ‘Foreign Direct Investment’ (FDI) and political violence which embraces war as well as terrorism among others. These are the various reasons which are identified to be responsible for increasing political instability among countries which are adversely hampering the business operations of companies. The financial crisis which includes severing debt crisis among the European nations and crisis among the Middle East and North Africa (MENA) are perceived to have affected the financial sector by a significant extent. Furthermore, the formulation of new fiscal policies by government of different countries is observed to be affecting the operations of financial instructions (Multilateral Investment Guarantee Agency, 2011; Woertz, 2008). A report published by Accenture (2012) denoted that the sovereign debt crisis in European nations and protests among MENA nations have raised political risk. Moreover, there are certain other sorts of risks which include increase of trade barriers along with assisting local companies to excel in comparison to foreign corporations. These factors may affect different countries in a considerable manner for most industries (Accenture, 2012; Mullen, 2009). As stated by Simpson (2007), political risk is determined to be affecting the business operations of banking sector in an adverse manner. The changing governmental policies as well as reforms are deemed to be impacting the banking sector on numerous aspects in relation to irregularity of cash flow and investment. Furthermore, Simpson (2007) also stated that the political risk factor tends to be affecting the returns of banking sector (Simpson, 2007). Political risk and banking sector of a country are inter-related with each other (Yartley & Andrianaivo, 2009). Yartley & Andrianaivo (2009) stated that political risk is recognised to be affecting banking sector with increased tax imposition and policies of trade agreements by the government that are identified to be minimising the investment flow. Moreover, these factors affect credit policies, liquidity of stock market and domestic savings of banking sector which reduce their availability of liquidity or cash. Yartley & Andrianaivo (2009) also stated that the unstable political scenario is the major cause of downfall of the stock market. The adverse political situation of the African countries is seemed to be affecting the business operations of financial as well as banking sectors (Yartley & Andrianaivo, 2009). According to Munir & et. al. (2011), the changes in the political condition of a country are observed to be affecting the operations as well as structure of banking sector. The changes in the political conditions are observed to be adversely impacting the liquidity as well as lending policies of the banking sector. Munir & et. al. (2011) also stated that there has been a great change in the banking sector due to deregulation, development of technology and globalisation and recent crisis on a global context in the United States. These factors are determined to be accountable for the changes in the government policies which are recognised to be affecting the performance of the banking sector (Munir & et. al., 2011). In the similar perspective, Abbas & Malik (2010) stated that government intervention in an immense manner is perceived to be affecting the performance of banking sector. Banking sector operates its business operations in accordance with certain policies and regulations which assist it to perform its tasks effectively in different countries. In this regard, changes in the fiscal and other related financial policies, controls and regulations by the government may decrease the efficiency as well as development of the banking sector (Abbas & Malik, 2010). It can be comprehended that political condition of a country is determined to be an important factor for business to perform allied operations effectively. The changing government policies and regulations due to financial crisis and technological developments among others are recognised to be affecting the business operations and structure of banking sector. Banking System in Bahrain An article published by ‘Arab British Chamber of Commerce’ (2011) implied that the banking sector in Bahrain has developed from the middle of the year 1970. During this year, Bahrain commenced its financial services in the region and performed its operations effectively in order to be recognised as a banking hub. In the year 2010, the banking sector of Bahrain depicted a figure of GDP of around 25.5% of the total output of the country. The financial services which are performed in the country are under the regulations of the ‘Central Bank of Bahrain’ (CBB) (Arab British Chamber of Commerce, 2011). The report of ‘Bahrain Economic Development Board’ (2008) described that the CBB is identified as the most prospering financial institution in relation to innovativeness, appropriate regulation policies, licence management along with treating in a non-discriminatory manner. These practices of the CBB have facilitated it to develop a friendly atmosphere in the global context (Bahrain Economic Development Board, 2008). The report published by ‘Global Investment House’ (2007) signifies that banking sector in Bahrain is determined to be an important constituent towards the development of its economic conditions. Moreover, the financial sector is deemed to be the major contributor for the GDP of the country after oil (Global Investment House, 2007). The report of ‘Global Investment House’ (2007) further denoted that the banking sector of the country has been observed to be expanding in a proficient manner during the period of 2005 to 2006. The CBB has been observed to be playing an important role towards the development of financial institutions and economic conditions (Global Investment House, 2007). According to a report published by Ghorfa (2012), Bahrain is identified to be a leading financial hub for the international financial market. The country is recognised to be acquiring around 400 licensed financial institutions which are renowned both at national as well as in international market segments. The banking sector of the nation has been recognised to be developing due best management principles as well as standards and stable fiscal policies (Ghorfa, 2012). Furthermore, the article published by Ghorfa (2012) further implied that the aforementioned factors are the major reasons which are perceived to be accountable for the development of the banking sector in Bahrain (Ghorfa, 2012). As stated by Hadiyat & Abduh (2012), the number of financial institutions in Bahrain has increased to 411 and the banking sector employs around 14,137 employees. The banking sector of this country consists of both conventional as well as Islamic banks. However, it has been observed that the banking sector of Bahrain has faced intense pressures from the political backgrounds and global crises which have led to their inefficiency and reduction of performance. Hadiyat & Abduh (2012) stated that the financial crisis has affected the banking sector on a global context. Moreover, the facet of financial crisis is observed to be affecting the economic conditions of the country. The growth of the economic conditions of the country has slowed down due to adverse political condition and financial crisis. The crisis also led to the reduction in the liquidity ratio of the banking sector after the crisis (Hadiyat & Abduh, 2012). According to a report published by RAM Ltd. (2011), the changes in the political conditions of the country have negatively impacted the banking sector. The political changes in Bahrain have been observed in the year 2011. Moreover, the chaotic political conditions and clashes are observed to be affecting the economic conditions as well as financial institutions. The article published by RAM Ltd. (2011) also implied that the foreign banks which are operating in the region have planned to relocate their business centre in order to survive the political unrest in the country. In this respect, it can be understood that the financial crisis as well as adverse political conditions have negatively impacted the banking sector. Moreover, Bahrain is recognised to loose its position as a financial hub (RAM Ltd., 2011). Ali & Al-Aswad (2012) stated that the political unrest which prevailed in Bahrain has severely hampered the financial sector based institutions which are operating in the country. In this respect, as a competing region, Dubai developed its financial segment by regulating its banking sector on the basis of western style. Bahrain is still observed to be under the persuasion of political instability due to the revolt which has occurred in Manama, the capital city of Bahrain (Ali & Al-Aswad, 2012). Kerr (2012) stated that BNP is the chief foreign bank operating in Bahrain. The increased tensed atmosphere in the country has initiated the bank to open a backup office in Dubai. The bank also opened an office of wealth management in Dubai in order to provide supports to clients. These measures are undertaken with the objective of safeguarding the bank and minimise the risks uprising from the unfavourable political conditions (Kerr, 2012). Kerr (2012) also stated that employees from the bank from the Bahrain offices are relocated to the office established at Dubai with the intention of protecting the employees from the political unrest situation in Bahrain. There are other banks which have followed a similar approach in order to survive from the unstable political situation (Kerr, 2012). These are the reasons which are determined to be affecting the banking sector in Bahrain. Moreover, these factors are also responsible for destroying the image of Bahrain as a stable and a regulated financial centre. According to the report of Al Salam Bank Bahrain (2012), the business environment had been recognised to be affected by the changing political conditions and financial crisis on a global context in the year 2011. These adverse conditions are observed to reduce the credibility of banking sector but B.S.C with the assistance of CBB had been able to perform its business operations in a steady manner. Moreover, the bank has been perceived to develop in the upcoming year (Al Salam Bank Bahrain, 2012). 3. Methodology Research Methodology The proposed study will be based on certain assumptions which will assist in conducting the research study in an appropriate manner. The assumptions of this study will be grounded on two concepts which include ontological and epistemological. Ontological and epistemological assumptions will be adopted with the motive of acquiring the knowledge as well as experience of the banking institutions which are operating in Bahrain about the political instability and financial crisis. The ontological assumptions will be founded on the reality about the unfavourable political and financial conditions faced by the banking sector in Bahrain in the recent years. Moreover, ontological assumption will aid in acquiring the truths which are possessed by employees of banks operating in Bahrain. The ontological assumption will be that ‘the adverse political condition and financial crisis have strongly impacted the banking sectors of Bahrain’. On the other hand, epistemology assumptions will be based on the facts related to the reality of information possessed in relation to the adverse effects Bahrain banks have experienced due to political unrest as well as financial crisis factors. The epistemological assumptions will assist in recognising the truth about the intense conditions which are prevailing in the political environment of Bahrain hampering its financial hub. In this respect, this research study will be based on these two assumptions of reality as well as knowledge which will assist in supporting the research approach to be utilised for the study. The epistemology assumption will be that ‘the officials will be able to relate the impact of political condition and financial crisis possess on their bank’. Research Approach The proposed research study will be based on a qualitative research approach. Qualitative approach will be used in order to ascertain the essential motives of certain phenomenon. A qualitative approach will be used for this research study as this study is based on the impact of adverse political and financial crisis situations in Bahrain. Moreover, the reason for using qualitative method for this study is that it will be difficult for determining the effectiveness of this proposed research in terms of numerical terms and the research subject is comprehensive in nature. Furthermore, the research study with the assistance of the qualitative approach will be able to determine the experience, ideas as well as beliefs about the different perspectives of employees of Bahrain’ banks about the political conditions and financial crisis which adversely have affected the operations as well as performance of banking sector in Bahrain. In this research study, a grounded theory will be considered in order to analyse the information which will be acquired from the banking sector of Bahrain. A grounded theory has been adopted for this research as the objective of the study is to determine the impact of political unrest and global crisis situations on the banking sector of Bahrain. This theory will be appropriate for this research study in order to ascertain the experience or knowledge of employees from the unfavourable conditions prevailing in the environment of Bahrain due to political instability and financial crisis. The grounded theory in this research study will assist to conceptualise the research subject in a more efficient manner. In the initial phase of the theory, the qualitative information which is acquired will be categorised. Correspondingly, the opinions of the banks of Bahrain will be documented for the purpose of analysis. In the final stage, the findings will be drawn on the basis of understandings which will be derived from the research analysis (Lingard & et. al., 2008). The purpose of using qualitative approach such grounded theory in this research study is that it would facilitate in acquiring a better knowledge as well as determining the reality with which the adverse political conditions and financial crisis situations had affected the banking sector in Bahrain. Moreover, the main objective of utilising a qualitative research in this research study is to determine the complex social factors such as political condition and financial crisis which affected the banks in Bahrain. Research Design Research Design The proposed research study is required to follow a research design in accordance with which measures are needed to be adopted for the effective completion of the research study. The research design will provide the steps as well as the procedures on the basis of which the study will be conducted. The research study will comprise both primary as well as secondary data. The primary data for the study will be collected from questionnaire survey. The questionnaire survey will be conducted amid the officials of banks which are operating in Bahrain about the threat imposed due to the changes in the political conditions and financial crisis. The questionnaire survey technique will be effective in acquiring relevant information from the officials of the banks in Bahrain about the unfavourable business conditions in relation to financial crisis and political conditions. The sample size for the questionnaire survey will consist of 50 banking officials. The questionnaire survey will assist in collecting the responses of the banking officials in relation to the adverse impact of political conditions and financial crisis of banking sector in Bahrain. Moreover, the responses or feedbacks of the banking officials will assist in accomplishing the objectives of this proposed research study in an effective manner. On the other hand, secondary data for this research study will comprise secondary sources such as journals and relevant academic sources depicting the impacts that change in political condition and financial crisis possess on the banking sector of Bahrain. Moreover, the secondary data collected are required to be relevant with the proposed research study with the intention of improving the effectiveness of the research subject. The primary as well as the secondary data which are to be collected will be analysed with the assistance of grounded theory. The data to be analysed will also be supported with tables and charts in order to increase the effectiveness of data collected for the proposed research study. Analysis of the data with the assistance of these methods will assist in obtaining relevant findings for the proposed study. Moreover, on obtaining appropriate findings from this proposed study, it will increase the significance of the research subject. Strengths and Weaknesses of the Proposed Approach The qualitative approach which has been devised to be adopted for the proposed research study will be appropriate for the study which is broad in nature. The proposed research study will be based on questionnaire survey which will enable in acquiring appropriate information from the banking officials of the banking sector in Bahrain. Moreover, the proposed study will acquire information from secondary sources such as journals and articles. The data collected from the secondary sources will assist in acquiring vast information or knowledge about the impact of political condition and financial crisis on the banking sector in Bahrain. The proposed research approach will assist in acquiring a better perspective of the impact of political conditions on the performance of business operations of banking sector. However, there are certain limitations which are attached with this proposed research study. The secondary data which are collected from the secondary sources might at times be out dated which may reduce the significance of this proposed study. The research subject of this proposed study is comprehensive in nature and accordingly the data to be analysed are required to be supported with charts and tables. The other limitation may be due to the fact that the banking officials may be reluctant in responding to the questionnaire survey which may restraint in collecting primary data. Free consent must be obtained from the respondents for conducting the interview survey and objectives of the proposed study should be conveyed for the effectiveness of the interview process. Timeline Possible Resource Requirement The primary resource which will be required for the proposed research study is mainly financial resource. The financial resources will be necessary for printing the questionnaire for 50 persons. Moreover, the financial resource will be required as travelling allowances to reach different banks and banking officials in Bahrain. References Abbas, K. & Malik, M. H., 2010. Impact of Financial Liberalisation and Deregulation on Banking Sector in Pakistan. PIDE Working Papers. [Online] Available at: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-64.pdf [Accessed April 17, 2013]. Accenture, 2012. Managing Political Risk. Site Collection Documents. [Online] Available at: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Managing-Political-Risk-Controlling-Loss-Finding-Opportunity.pdf [Accessed April 17, 2013]. Advisen Ltd., 2013. Political Risk Exposures of Financial Institutions. White Paper. [Online] Available at: https://www.advisen.com/pdf_files/2013_AIG_PoliticalRiskReport.pdf [Accessed April 17, 2013]. Al-Hassan, A. & et. al., 2010. The GCC Banking Sector: Topography and Analysis. IMF Working Paper. 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