Abstract
Competition and over-banking in the United Arab Emirates (UAE) indicates serious efficiency challenges facing the UAE banking sector prior to full compliance of the Bassel II capital accord in 2007. Using Data Envelopment Analysis (DEA), this paper investigates the relative efficiency measures. Six measures of efficiency performance are used: allocative, cost, pure technical, technical, scale and overall, using data from the annual financial reports from 1998 to 2002. Despite overall growing profits in the industry, results reveal evidence of over-banking and cost inefficiency in the money market. In particular, evidence suggests that regulatory and not managerial policy implications are attributed to poor cost efficiency results. Interestingly, and contrary to the benefits of economies of scale, the most efficient banks are not always the largest banks. Further evidence identifies contributory structural reasons for UAE banking inefficiency such as extensive capital adequacy ratios. At a time of growing global competition, data transparency and compliance with the World Trade Organisation, some individual banks need to address their financial positions to sustain high future profits.
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