url
12
Feb
2014

THE EFFECT OF BANKING EXPANSION ON PROFIT EFFICIENCY OF SAUDI ARABIA COMMERCIAL BANKS: SUMMARY AND CONCLUSIONS

The results indicate that the “number of POSs”, the “availability of PC banking” and the “availability of mobile banking” may have no benefits in term of “profit efficiency”. This means that we could accept the null hypothesis, for each of the third, fifth and sixth hypothesis, at a p-value of 1%.
Regarding the first hypothesis, the results show no strong evidence about the effect of “number of branches” on “profit efficiency”, as this effect appears only when using “profit efficiency of ROE”, and at a p-value of 5%.
Tests indicated that we could strongly accept the second and fourth hypotheses regarding the effects of “number of ATMs” and “availability of phone banking” on profit efficiency of Saudi banks.
This paper considers the effects of banking expansion on profit efficiency of the Saudi banks. This has been conducted using a sample of 6 commercial banks (out of 11), and covering the period from 1998 to 2007. Profit efficiency has been measured using the ratio of actual profitability to the best one, which a similar bank can realize.
The significance of this paper is due to two main issues; the first is shedding light on profit efficiency development of Saudi banks during the period 1998- 2007, and the second is concerning with examining the determinants of profit efficiency, assuming that it’s influenced by banking expansion.
Tests indicated that we could accept hypotheses regarding the effects of “availability of phone banking”, “number of ATMs” and “number of branches” on profit efficiency of Saudi banks, also referred to the need to reject the hypotheses regarding the effects of “number of POSs”, “availability of PC banking” and “availability of mobile banking”.
Regarding the ATMs, it’s important to consider that shared ATMs and networks let customers benefit more regardless their bank. So, the reliability of “number of ATMs”, which is belonging to a certain bank, may not be reliable as an indicator to transactions done using ATMs. Also, there are still many outstanding issues and questions about pricing, surcharging, and other costs. Aussubel highlights two possible costs in seeking to change credit card products, where customers have to find information on alternative providers (search cost), and have to switch to alternative one (switching cost). This puzzle is affected by asymmetric information and consumer behavior. It’s, also, could be based on “tacit collusion” between banks. For the “availability of PC banking” and the “availability of mobile banking”, it’s argued that the “pricing puzzle” is still one of the outstanding issues.
The results show that the most important determinants of “profit efficiency” are the “availability of phone banking” and the “number of ATMs”. Thus, this result is consistent with the idea that “availability of phone banking” rather than any other determinant, in this study, is what affects profit efficiency, as it illustrates the behavior of profit efficiency (using ROA), giving R2 of 0.564, while adding “the availability of ATMs” raises R2 to 0.637.
For further research, it will be important to study variations of profit efficiency among banks within the same period, and variations among periods for the same bank, using other determinants, related to risk, service quality, or organizational development.

The results indicate that the “number of POSs”, the “availability of PC banking” and the “availability of mobile banking” may have no benefits in term of “profit efficiency”. This means that we could accept the null hypothesis, for each of the third, fifth and sixth hypothesis, at a p-value of 1%. Regarding the first hypothesis, the results show no strong evidence about the effect of “number of branches” on “profit efficiency”, as this effect appears only when using “profit efficiency of ROE”, and at a p-value of 5%. Tests indicated that we could strongly accept the second and fourth hypotheses regarding the effects of “number of ATMs” and “availability of phone banking” on profit efficiency of Saudi banks. This paper

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Kevin J. Brandon

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