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«Adoption of Internet Banking in United Arab Emirates Gulfam Ashraf Submitted to the Institute of Graduate Studies and Research in partial fulfillment ...»

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Adoption of Internet Banking in

United Arab Emirates

Gulfam Ashraf

Submitted to the

Institute of Graduate Studies and Research

in partial fulfillment of the requirements for the Degree of

Master of Science

in

Banking and Finance

Eastern Mediterranean University

June 2012

Gazimağusa, North Cyprus

Approval of the Institute of Graduate Studies and Research

Prof. Dr. Elvan Yılmaz

Director

I certify that this thesis satisfies the requirements as a thesis for the degree of Master of Science in Banking and Finance.

Assoc. Prof. Dr. Salih Katırcıoğlu Chair, Department of Banking and Finance We certify that we have read this thesis and that in our opinion it is fully adequate in scope and quality as a thesis for the degree of Master of Science in Banking and Finance.

Assoc. Prof. Dr. Nesrin Özataç Supervisor Examining Committee

1. Assoc. Prof. Dr. Eralp Bektaş

2. Assoc. Prof. Dr. Nesrin Özataç

3. Assoc. Prof. Dr. Salih Katırcıoğlu ABSTRACT Comparing internet banking with conventional banking in United Arab Emirates is the main purpose of this thesis. Internet banking services have been greatly expanded and are greatly used in United Arab Emirates. This study will try to answer our question that which one of the banking system is more profitable; hence which one of United Arab Emirates banks are using. They will use more of the system in order to maximize their profitability. In this study financial ratios are used and are particularly used to evaluate the banks in checking the performance of the two systems. For the process of evaluation, we will use E-views software which helps us in making the hypothesis in regards to ttest, f-test and regression analysis.

Keywords: Internet Banking, Conventional Banking iii ÖZ Bu çalışmanın amacı internet bankacılığının birleşik arap emirlikleri bankacılık sisteminde uygulannması ve karlılık üzerinde etkileridir. Bankacılık sisteminin gelişimini 7 tane ticari bankayı ele alarak 2005-2011 yılları arasındaki performansları bilanço ve gelir gider tabloları incelenmiştir. Performanslar ampirik çalışmlara sonucunda irdelenmiş ve bankaların internet adaptasyonun banka performanslarını ne şekilde etkilediği incelenmiş ve internet kullanımının banka büyüklüğü ve karlılıkla doğru orantılı olduğu görülmektedir.

Anahtar kelimeler: Internet Bankacılığı, Geleneksel Bankacılığı

–  –  –

First of all, I would like to thank Allah Almighty, The Most Beneficent, for blessing me with enormous benevolence. Nothing would have been possible without the strength, competency, dexterity and efficiency that He blessed me with. I highly value the help and guidance of my Supervisor Assoc.Prof.Dr Nesrin Ozatac for her immense help and support throughout my thesis and my academic life as well. Dr Nesrin Ozatac not only gave me her valuable time whenever I needed it but also she showed confidence in me when I was surrounded with confusions and difficulties. Also my regards to Assoc. Prof.

Dr Salih Katircioglu head of the Department of Banking and Finance for helping me in the result that was in progress from E-views.

Secondly, I would also like to appreciate the help of my friends especially Nigar hocam for helping me completing my thesis, without her support it would have been very difficult. Amjad Taha who has always given me positive enthusism making me finish my research at the right time.

And last but not the least I am highly obliged to my parents Mr. and Mrs. Muhammad Ashraf, my sister Miss Areej for the continuous support, encouragement and the trust they placed in me.

–  –  –

Abstract

………………………………………………………………………….… iii ACKNOWLEDGEMENTS……………………………………………

LIST OF TABLES………………………………………………………………… viii LIST OF ABBREVIATIONS…………………………………………………….. ix 1 INTRODUCTION ……………………………………………………………….… 1

1.1 Aim of the study ……………………………………………………….......... 2

1.2 Scope of the study ………………………………………………………….. 2

1.3 Structure of thesis …………………………………………………………… 3 2 LITERATURE REVIEW …………………………………………

3 UAE BANKING SYSTEM……………………………………………………….. 11

3.1 2008 Crisis for UAE banks…………………………………………………. 11 4 Methodology………………………………………………………………………. 17

4.1 Introduction………………………………………………………………….. 17

4.2 Data………………………………………………………………………….. 17 4.2.1 Dependent Variable ……………………………….………………….. 19 4.2.2 Independent Variable…………………………………………………. 20

4.3 Methodology………………………………………………………………… 22 5 Empirical Results…………………………………………………………………. 24





5.1 Correlation Analysis…………………………………………………………. 24

5.2 Auto Correlation……………………………………………………………... 25

–  –  –

5.3.1 Significant Variables……………………………………..……………. 27 6 Conclusion……………………………………………………………………….. 29 REFERENCES………………………………………………………………….. 31

–  –  –

Table 3.1: List of bank in United Arab Emirates………………………………… 14 Table 3.

2: Banks with their Internet Information………………………………… 15 Table 4.1: The variables notation and their measurement………………………... 19 Table 5.1: Correlation of Variables……………………………………………….. 25 Table 5.2: Regression Analysis for Return on Equity……………………………...26

–  –  –

1.1 Background of the study Banking in United Arab Emirates (UAE) started in 1980, when a proper central bank was established. At first it was hard for the banks to be established as the government of UAE strictly regulated, due this there was no new innovation in this sector. Slowly there was allowance for local banks to be established which were not that eager to compete with each other, as they were highly regulated. These local banks had established their own private webpage but majority of the transactions were done over the counter. This was major case until in 2004 due to pressure from World Trade Organization (WTO) the Central Bank allowed Establishment of foreign banks in UAE1. These foreign banks brought the innovation system which would bring productivity and efficiency to the banking sector of UAE and internet banking was part of it.

Today Internet is the driving force in the banking sector. If it was not for the internet banking would had been limited to physical presence of its phenomenon, where the costumer would get service face to face. The problem with this is that it was not efficient and a new ways were to be found eventually. As all goods and services in capitalism, banking had to change or innovate new ways to make profit. So internet was a viable http://lcweb2.loc.gov/frd/cs/profiles/UAE.pdf alternative to naturally progress the banking sector. As internet was slowly introduced by bank, at first a mere portal giving information regarding the bank. But with more resources and time banks were able to provide more services to the costumers.

1.2 Aim of the study In this thesis the aim is to analyze bank specific determinants with and without internet banking. Even though there has been numerous studies done in the field of banking, not much is research have been done in terms of internet banking. Also not much research has been done in regard to banking sector in the Middle East and especially related to internet banking. In the last few years United Arab Emirates has greatly improved and innovated its banking sector, to an extend that it is leading in this sector in the region. It would be interesting to study on how United Arab Emirates was able to succeed and what kind of benefits is getting from it.

1.3 Scope of the study The main purpose is to find the relationship that has internet start helping the banking system profitability. For this we also have to research that is customers viewing internet banking as efficient medium of services they can attain. But we can make assumptions like customers with higher education are more likely to use the services, or people with faster internet services. In the end we will use these assumptions and help the profitability ratios in order to examine the performance of the banks in regards to

internet banking. These Ratios will be:

 Return on Equity (ROE)  Return on Assets (ROA)  Equity of Total Assets  Profit margins.etc.

1.4 Structure of the thesis The paper is organized in following order. Section 2 will be literature review based on previous studies, section 3 will have methodology and research data, empirical results will be in section 4 and finally conclusion and recommendation will be present in section 5.

–  –  –

There have been previous studies done accordingly in regard to internet banking and profitability. The papers being presented are varied in region and topic, but the main aim of these topics are on profitability of banks in regard to internet banking. The studies which are included of Malhotra and Singh (2004), Sumara and Manzoor (2011), Gopalakrishna, Wischnevsky and Damanpour (2003), Onay, Ozsoz and Helvacioglu (2008), Floros (2008), Furst (2002), Furst, Lang and Nolle (2000), Aktan.B and Teker.E (2009), Batan.A.M and Kamil.A.A (2010), Mansumitrchai and Chui (2012), Hajri.S (2008).

According to the study conducted by Malhotra and Singh(2004) which they tried to use advances to technology which it infuses are investigated and which brought shift in banking operations. The paper tries to use statistical analysis, relative to other banks in respect to profitability, cost efficiency and other characteristics. Differences between non internet banks and internet banks were emerging in funding, in sources of income, expenditure and measures of performance. In the conclusion of the paper it was researched that public banks are not providing proper or lagging behind in internet banking than private banks. Also they concluded that internet banking is not a significant determinant in explaining the profitability for all the banks. Internet banks in private sector are significantly less profitable than non internet banks; this is also the case in public banks2.

According to the study done by Furst, Lang and Nolle (2000). They tried to explain why banks are choosing to adopt the internet banking in their service and how much profitable is it for them. Banks are looking at internet banking as their next step for providing services which in return brings ease to the customer. Internet banking also decreases the cost of operating their services. But according to the study due to few customers using it this technology is not profitable. In fact internet banking might be the reason that small banks are not profitable as they are using their resources in keeping their internet banking service of which demand is low. Even large banks are not profitable but due to their vastness of their business their loss on internet banking can be covered3.

Furst again in (2002) wrote a study regarding internet banking profitability that used multivariate logistic regressions to check the factors affecting adoption of internet banking. From regression it was included that internet banks provide a better accounts efficiency ratio and equity returns are higher than non internet banks. Still new smaller banks which are using internet banking are not able to attain profitability. The reason for this is given with regard to that new banks are still using all their resources in setting and maintaining the web site for internet banking and the demand has still not caught up for it to be profitable. It was concluded in the study that as time passes information http://www.arraydev.com/commerce/JIBC/0406-08.asp http://www.newyorkfed.org/newsevents/events/research/2001/Furst.pdf technology will catch up and will transform the banking sector to fully support its internet banking. For this revolutionary developments are needed to be more viable for consumers, as they can easily attain and use it. But for now the internet banking is in novice stage4.

According to paper written by Gopalakrishna, Wischnevsky and Damanpour (2003) internet can converge different technologies to enhance different industries. There are major performance implications for internet in banking sector. If we look other industries that radically implemented internet for example in brokerage firms provided lower prices to customers than conventional one. For example; Charles Schwab (2002) was quickly able to adopt online brokerage technology and provide it in comparable prices with better research quality.

So as with e- Brokerage industry, in the long run, the incumbent banks will be able to give better internet service to its customers. They will be able to better compete with the conventional mean with introduction of better products and process innovations, which will alter the way they do business. For now the banks are still in the process of innovation and are not able to have a significance impact like the e-brokerage5.



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