Financial derivatives and the commercial banks performance in UAE

Abstract

The introduction of derivatives at the financial market of the United Arab Emirate (UAE) is to enhance liquidity and broadens the range of securities. This is because it brings exciting opportunities for investors to diversify their investment in an efficient and cost-effective way. Evidence from previous studies has shown that financial market derivatives help to reduce risk. Even though trading losses produced by unsuitable derivative activity are frequently big enough to create financial problems and even bankruptcy, there is minimal research on how bank profitability and performance are affected. The study examines the determinants of financial derivatives on the performance of commercial banks in UAE and the financial risk exposure between derivatives financial assets and derivatives financial liabilities. The research employs Pecking order theory, panel ARDL and data from 30 commercial banks’ financial statements in 2020 in UAE. The study found that an increase in the level of return on assets will create an increase in traded financial derivatives that will enhance bank performance by a high level of percentage. Stability of the banking sector in UAE is recommended to enhance better performances of commercial banks on financial derivatives in UAE.