url
4
Feb
2014

THE EFFECT OF BANKING EXPANSION ON PROFIT EFFICIENCY OF SAUDI ARABIA COMMERCIAL BANKS: INTRODUCTION

Financial services firms, especially banks, provide financial products and payment services, which offer vehicles for investment of savings, and availability of credit, and consequently enable their customers to participate in the broader economy.
Saudi banks play an important role, not only as a financial intermediate serving depositors and borrowers and encouraging economic growth, but also as the largest Arab banks, and this is why it’s important to concern with the analysis of their performance efficiency.
Saudi banks have expanded their activities, which are reflected by the growing assets during the last decade, and consequently, numbers of branches, number of ATMs, and number of POSs have been increased. The following table illustrates these developments. Profit maximization doesn’t express efficiency, as it doesn’t take in account the bank size. So, profitability is common to be used as a measure of efficiency. However, it doesn’t imply – precisely – that there is a significant inference among banks’ efficiency in terms of their profitability. In case of having two banks, where the first has ROA of 10%, and the second has ROA of 12%, we can’t argue that the second is better than the first, until we investigate the maximum ROA, which each of them can realize. If the maximum ROA is 10% and 15% for these two banks consequently, then the profit efficiency of the first one will be better than the second.
This paper addresses a main question about determinants of Saudi banks’ profit efficiency, where it’s measured by “how well bank performs relative to best practice institution that produces the same output bundle under the same exogenous”. Determinants of profit efficiency, to be examined, are variables related to banking expansion, concerning with banking branches, and other innovations regarding using IT technology to substitute or help with branches as traditional marketing channels.
The paper unfolds as follows: after this introduction, section 2 reviews research literature that has concerned with tools of “banking expansion”, and their potential effects on banks’ performance. Section 3 explains how to measure variables representing “banking expansion” and “profit efficiency”, and illustrates how to test the hypotheses. Section 4 is for empirical work, presenting results and discussing how these results answer research questions. Section 5 summarizes the paper and provides brief conclusions.

Table (1): Development of Saudi banks from 2002 to 2007

At end of AssetsBy million S.R. No. of Branches No. of ATMs No. of POSs
2002 508237 1203 3120 24291
2003 545208 1209 3676 29060
2004 655382 1216 4104 35521
2005 759075 1224 4588 44253
2006 861088 1289 6079 52784
2007 1075221 1353 7543 61557

Financial services firms, especially banks, provide financial products and payment services, which offer vehicles for investment of savings, and availability of credit, and consequently enable their customers to participate in the broader economy. Saudi banks play an important role, not only as a financial intermediate serving depositors and borrowers and encouraging economic growth, but also as the largest Arab banks, and this is why it’s important to concern with the analysis of their performance efficiency. Saudi banks have expanded their activities, which are reflected by the growing assets during the last decade, and consequently, numbers of branches, number of ATMs, and number of POSs have been increased. The following table illustrates these developments. Profit maximization doesn’t express efficiency, as it

About The Author

Kevin J. Brandon

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