Profitability of Banks in the Middle East - Research Paper Example

Profitability studies are standard and even expected for any industry that thrives as a business.  As the continuity of profit realization remains a requisite for the continued existence of the business, then banks likewise have not only an interest in but a duty to investigate the drivers of their profitability, and to optimize the existence of these drivers. Nowhere is this probably more important than in the Middle East region, which Price Waterhouse Coopers (PWC, 2010) calls “one of the world’s fastest growing markets in the banking and capital markets sector”.

  PWC analysts view this region’s financial sector as one that has undergone a “massive overhaul” that has metamorphosed from the slower, more traditional forms of banking services towards a more dynamic sector offering a wider and more diverse array of banking services.  This is attributable to the younger and more educated population from which are drawn the banks’ management pool, workforce, suppliers and which comprise the customers whose more sophisticated and complex financial needs are being met by the banks.

  The result is a more competitive financial sector which vies for market share, depositors and borrowers, and ultimately for ever-increasing profits.  Furthermore, increasing regulatory requirements for the purpose of monitoring and oversight provides ever-growing challenges for providers of innovative financial services and products.  The financial environment in the GCC countries is characterized by minimal government intervention, well developed financial sectors, low market concentration (greater dispersal of banking activity), and greater market efficiency.

  In other countries in the region, however, public sector banks dominate the banking industry.  Market concentration is high among half the Middle East countries, as banking activity is centered in the government-controlled banks.  The result is a high level of government intervention particularly in credit allocation, liquidity problems, higher costs, wider interest rate spreads, and persistent losses.  According to PWC, the assets of the three largest banks among these countries make up 65 percent of total commercial bank assets, thereby dampening enthusiasm for new banks to enter the market.