Assessing Competitive Advantage of Banks in GCC Countries

Mai M Abdo,Ibrahim A Onour

doi:10.18639/merj.2020.990011

Abstract

The purpose of this paper is to assess competitive advantage gained by large-sized banks in the Gulf Cooperation Council (GCC) countries. To investigate the association between return to scale and profitability, the authors have adopted quintile and logistic regression analysis, using data for 81 and 84 banks operating in GCC countries during the years 2016 and 2015, respectively. Their findings indicate a positive association between bank size and increasing return to scale, implying that bigger banks show increasing return to scale, but with decreasing rate, as represented by the negative coefficient of the square of the asset variable. Their results also show medium and upper quintiles of profits are significantly and positively associated with assets, but negatively associated with deposits, implying banks with larger deposits are facing liability management problems. In general, these results support the evidence that large-sized banks in GCC countries are displaying competitive advantage gains over small-sized banks, but these competitive advantage gains are decreasing with bank size increase.

Highlights

The domination of large banks in the banking industry is caused by increasing return to scale that gives large banks the competitive advantage in cost minimization compared to its smaller competitors
Once such selection expertise has been gained, banks with larger sizes gain higher lending capacity, and maintain higher profits. Another dimension enhancing competitive advantage of bigger banks is homogeneity of financial products of banks, which enables bigger banks to gain from competitive environment in the banking system.This is because the borrowing business firm prefers funding by a large-sized bank with more expertise to boost the quality of the investment project in the market
Miles merj.scholasticahq.com and Sapci (2017) use a panel data analysis for 198 banks to show that as bank size increases, return to scale decreases. Given these conflicting results on banks’ size and return to scale in developed countries, the current paper aims to fill the void of research in the relationship between banks’ size and return to scale in Gulf Cooperation Council (GCC) countries

Summary

Introduction

The domination of large banks in the banking industry is caused by increasing return to scale that gives large banks the competitive advantage in cost minimization compared to its smaller competitors. The most important sources of increasing return to scale in banking systems are proficiency and capabilities gained by large banks in vetting profitable investment projects as well as reducing bad loans Once such selection expertise has been gained, banks with larger sizes gain higher lending capacity, and maintain higher profits. Another dimension enhancing competitive advantage of bigger banks is homogeneity of financial products of banks, which enables bigger banks to gain from competitive environment in the banking system.This is because the borrowing business firm prefers funding by a large-sized bank with more expertise to boost the quality of the investment project in the market. Bigger banks can compete better for public funding because they are trustier to investors as they can better diversify portfolio investments and reduce risks

Objectives

Results

Conclusion