Gulf Cooperation Council Banks Research Articles

Readability and banks’ risk-taking behavior: Evidence from GCC

We investigate the relationship between annual reports’ text readability and bank risk-taking in the Gulf Cooperation Council (GCC) countries. We find that easy-to-read annual reports are associated with a higher probability of banks’ insolvency. This finding suggests that banks with higher risks have a greater incentive to reduce information asymmetry, resulting in easy-to-read annual reports to gain the trust of the banks’ investors. The result is also attributable to the fact that GCC banks have a tight culture and formal procedures that bank managers rely upon to manage uncomfortable circumstances like risk-taking behavior. Our study findings also suggest that the traditional dynamics of market discipline theory do not effectively operate within the GCC banking environment. This might be attributed to the inadequate governance frameworks established for these financial institutions.

GCC Banking Companies Risk Management Practices and its Impact on Their Financial Performance

This article aims to explore the risk management practices (RMPs) of Islamic banks (IBs) and conventional banks (CBs) in the Gulf Cooperation Council (GCC). It assesses the different phases of RMP, including risk understanding; risk identification; risk assessment and analysis; and risk monitoring. This study conducts a structured survey questionnaire to assess the RMP in both types of banks. We find that both types of banks rank the importance of RMP above the mid-point of the 5-point Likert scale. Using t-test analysis, we find no significant difference in RMP between both types of banks, except for understanding risk practice phase. Managers of CBs have a better understanding of risk management (RM) than IBs. We also examine the impact of RMP on banks’ financial performance. The average return on Assets (ROA) and the average return on equity (ROE) over the years (2010–2017) are used as a proxy for financial performance. Applying robust White regression OLS, we find a significant impact on financial performance measures only for IBs. We refer to the fact that IBs follow the equity approach based on risk-sharing with their clients (depositors and investors). The regulatory authorities may find this study useful in enticing banks to implement the best RMP and so improve banks’ performance.

Do national culture and economic freedom affect bank risk-taking behavior? Evidence from GCC countries

PurposeThe global financial crisis of 2008 has put greater doubt on the bank risk-management effectiveness around the world. As a part of the response to such doubt, the Gulf Cooperation Council (GCC) region is formulating some feasible approaches to manage bank risk. In this regard, an understanding of the role of the region’s culture and economic freedom will provide immense input into this risk management approach. This study examines the impact of national culture and economic freedom on bank risk-taking behavior.Design/methodology/approachData on bank risk measures, culture and economic freedom are obtained from the FitchConnect, World Bank database, Hofstede’s insights and Heritage Foundation. Generalized least squares and two step-system generalized method of moments are then used to examine the risk-taking behavior of the region.FindingsBanks of the GCC region operating in the low power distance, high collectivism, masculine and low uncertainty avoidance cultures are susceptible to assuming more operational and insolvency risks. Furthermore, banks’ overall risk-taking inclination is positively increased once the region has considerable business and monetary freedom.Practical implicationsThe governments and bank regulatory bodies may benefit from the study findings by developing the best economic freedom index and national culture that enriches risk management practices and curves excessive risk-taking inclination.Originality/valueTo the best of the authors’ knowledge, this study is the first attempt to address the interplay among culture, economic freedom and bank risk to ensure constructive risk-taking behavior for the GCC banking industry.

Does intellectual capital in Islamic banks outperform conventional banks? Evidence from GCC countries

PurposeThis study explores, first, the performance effect (accounting- and market-based performance) of intellectual capital (IC), measured using the value-added intellectual coefficient (VAIC) and its modified version (MVAIC), on Islamic and conventional listed banks in Gulf Cooperation Council (GCC) countries and, second, whether Islamic banks outperform conventional banks in utilising IC.Design/methodology/approachUsing resource-based view theory and literature reviews, regression analyses are conducted on data for the period 2012–2019 on 26 Islamic and 42 conventional banks. For hypothesis testing, the generalised method of moments panel data regression analysis is applied after addressing endogeneity issues.FindingsResults, after controlling for corporate governance, indicate that the performance effects of IC (VAIC and MVAIC) on both bank types largely converge and Islamic banks do not outperform conventional banks in IC use. IC has a stronger effect on accounting performance measures for conventional banks than for Islamic banks, but IC has some effect on market performance measures for Islamic banks alone. Corporate governance variables do not play a significant role in the presence of VAIC and MVAIC although there are differences in corporate governance between the two bank types.Originality/valueThis study bridges the gap in GCC banking sector literature on the association between IC efficiency and performance measures of Islamic and conventional banks, from a comparative perspective. It enhances understanding, about the IC–financial performance nexus, of policymakers, regulators, bank managers and other stakeholders interested in the influence of different business models, financing/investment methods and governance structure on the performance of both bank types.

Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries

There is no doubt that oil price shocks significantly affect oil-producing countries' macroeconomic fundamentals and financial stability, mainly in crisis times. The recent oil price shocks, coupled with the COVID-19 pandemic, motivated us to investigate the connectedness and risk transmission among oil shocks and banking sectors in the Gulf Cooperation Council (GCC) economies from June 30, 2006, to September 9, 2021. Thus, we construct multilayer information spillover networks between oil price shocks and GCC banking sectors. The empirical results show that the Bahrain banking sector depicts the highest connectedness and risk transmission with oil price shocks on the extreme risk spillover layer. In addition, Kuwait and the United Arab Emirates are highly connected to oil demand shocks. Furthermore, we find a substantial increase in extreme risk spillover and volatility spillover layers during the COVID-19 period. The results of this paper have some important implications for regional portfolio risk management, alleviating systemic risk, and developing hedging and investment strategies.

GCC banks’ capital and liquidity: conventional versus Islamic banks

PurposeThis study strives to examine the relationship between bank capital and bank liquidity level considering the joint determination of both variables pointed out in the related literature. The evidence is from the Gulf Cooperation Council (GCC) countries: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman. The theory of banking postulates that bank capital and bank liquidity are interrelated through various links. The study conjectures that large GCC banks do not have a concern with respect to liquidity due to the implicit guarantee of GCC wealthy governments to bank deposits.Design/methodology/approachThe study sample is comprised of all chartered GCC conventional and Islamic banks. The study employs several on-balance sheet ratios to proxy for bank capital and liquidity as defined in the banking literature. It also employs a related econometric model that considers the simultaneity issue pointed out in the related literature.FindingsThe results of the study reveal that GCC banks react positively when facing illiquidity by strengthening their capital ratio. Further analysis reveals that only small GCC banks (conventional and Islamic) tend to increase their capital levels when facing a liquidity shortage, which confirms the study conjecture that larger GCC banks have no credible concern about their liquidity position. Employing an alternative measure of liquidity does not change the results. This finding supports the financial fragility structure and the crowding out of deposits hypotheses.Originality/valueThe study contributes to the literature by employing a novel estimation approach to explore the difference in results as the sample banks represent two banking regimes, the conventional banks as well as the Islamic banks. Also, the study implicitly suggests that further research in this area could support the need to impose minimum and globally uninformed liquidity standards on banks.

Corporate governance and effect in fintech: Evidence from Gulf Cooperation Council banking sector

This study looks at the banking sector in the Gulf Cooperation Council (GCC) from 2013 to 2021 to determine the impact that corporate governance had on financial innovation, as well as the impact that financial innovation had on performance. Thirty (30) commercial banks with 270 annual observations were selected, including 5 banks from each country. In order to quantify the factors at play, we queried databases such as Refinitiv Eikon and Fitch Connect. The research indicates that banks with a greater number of directors with backgrounds in finance or accounting, a higher attendance rate of directors, a higher ratio of independent directors, a higher average director education level, and a greater number of directors with a background in finance or accounting, provide more cutting-edge financial services. Since 2017, corporate governance has been a more significant factor in how banks approach providing new, cutting-edge financial services to their customers. Furthermore, a bank’s profitability and value will rise in direct proportion to the extent to which it provides cutting-edge financial services. Furthermore, the value of financial holding subsidiary banks could rise if they provided more innovative financial services. However, the same action taken by non-financial holding banks could have a negative impact on their profitability.

THE SYSTEMIC RISK IN THE GULF COOPERATION COUNCIL COUNTRIES’ EQUITY MARKETS AND BANKING SECTORS: A DYNAMIC COVAR APPROACH

This paper examines the systemic risk and its spillover between banking sectors of the Gulf Cooperation Council (GCC) region using the conditional value-at-risk framework. We construct country-specific banking indices using 11 large banks in the region that are systemically important (SIB). We report evidence of systemic risk spilloversfrom SIBs to the broad-based GCC market indices. The incremental tail spillovers are statistically significant for other domestic banks’ tail risk and inflate the systemic risk of cross-country GCC banks.

THE SYSTEMIC RISK IN THE GULF COOPERATION COUNCIL COUNTRIES’ EQUITY MARKETS AND BANKING SECTORS: A DYNAMIC COVAR APPROACH

This paper examines the systemic risk and its spillover between banking sectors of the Gulf Cooperation Council (GCC) region using the conditional value-at-risk framework. We construct country-specific banking indices using 11 large banks in the region that are systemically important (SIB). We report evidence of systemic risk spilloversfrom SIBs to the broad-based GCC market indices. The incremental tail spillovers are statistically significant for other domestic banks’ tail risk and inflate the systemic risk of cross-country GCC banks.

Do trust and country governance affect credit growth in GCC countries?

PurposeThis study aims to investigate whether quality of governance (QoG), trustworthiness and confidence impacted bank credit growth in Gulf Cooperation Council (GCC). In addition, it examined whether credit growth differed between Islamic and conventional banks in GCC countries.Design/methodology/approachUsing data from 104 (56 conventional banks and 48 Islamic banks) banks located in GCC countries from 2012 to 2019, the two-step system generalized method of moments estimator was used to analyse the data.FindingsEvidence was found of the influence of trust in institutions in boosting credit growth. The QoG generally expanded credit growth which instilled confidence in the economy and the banking sector. Credit growth was more pronounced for Islamic banks. This paper has contributed to the literature evaluating the determinants of credit growth in GCC.Originality/valueThis paper has been one of the few studies exploring the effect of trustworthiness and confidence (informal institutions) and macro governance (formal institutions) in GCC. GCC is different from other regions, as it is oil-dependent and shares similar legal, social and cultural aspects. This suggested that these might yield different results than expected.

Board Governance Mechanisms and Liquidity Creation: A Theoretical Framework

Objective – The highly concentrated ownership structure, lack of quality information, and weak regulatory environments caused imbalances in the movement of cash flows and thereby put the liquidity levels of Gulf Cooperation Council (GCC) banks on a downward trend. This prompted policymakers in the GCC region to modify their Corporate Governance (C.G.) codes to boost the financial position of the GCC banking industry as liquidity providers and minimize systemic risk. Therefore, the purpose of this study is to conceptually investigate the relationship between board governance attributes and liquidity creation in the GCC banking sector. Methodology – The methodology employed in this study is a review of prior research on bank governance mechanisms and liquidity creation to gather perspective and establish a prediction about the association between board attributes and liquidity creation in the GCC banking industry. Findings – The study concludes that there is a positive correlation between the analyzed board governance features and the creation of liquidity based on several theories gleaned from a review of prior research. Novelty – The study evaluates bank liquidity creation and how board attributes influence it. Type of Paper: Review JEL Classification: M41, M49. Keywords: Liquidity Creation, Corporate Governance, Agency Theory, Board Attributes, GCC. Reference to this paper should be made as follows: Mousa, A.K.A; Hassan, N.L; Pirzada, K. (2022). Board Governance Mechanisms and Liquidity Creation: A Theoretical Framework, J. Fin. Bank. Review, 7(2), 122 – 134. https://doi.org/10.35609/jfbr.2022.7.2(3) _______________________________________________________________________________________

A Comparative Financial Performance of the GCC ’s Largest Banks During the Pandemic

This paper investigates the financial performance of the largest Gulf Cooperation Council (GCC) banks by total assets before and during the recent COVID‑19 pandemic. The purpose of the study was to identify the impact of the COVID‑19 pandemic on banks’ financial performance. Financial ratios analysis during the period 2017–2020 is employed to measure the financial performance of the largest GCC banks mainly based in Saudi Arabia, Qatar, United Arab Emirates, Kuwait, Oman, and Bahrain. The ratios cover key performance areas such as profitability, efficiency, liquidity, asset quality, asset risk, and expense management. Two significant developments in 2020 are the COVID‑19 pandemic and severe drop in oil prices, both of which led to a sharp drop in the region’s GDP growth rate from an average of –0.09% in year 2019 to –5.9% in 2020, which in turn is expected to negatively impact bank performance. Using paired samples t-test the research study found statistically significant results that the financial performance of all banks suffered on almost all the key parameters in 2020 compared to the earlier period which can explained by the decline in economic activity due to COVID‑19. The focus of this study and its conclusions are novel to the extent that there are no country specific studies related to impact of COVID 19 on the biggest banks in a country. Further as far as the authors know there are no studies on the topic of impact of COVID‑19 on big banks operating in the Gulf cooperation council countries. The conclusions of the study would of importance to the regulators who would not like the big banks to fail.

The Effect of Dividend Policy on Stock Market Price Volatility of Banks in the Gulf Cooperation Council (GCC) Markets:

This study examined the effect of dividend policy on the stock market price volatility of banks in the GCC markets. The study data were obtained from the annual financial reports and accounts of the selected sampled banks. The study used the panel data analysis fixed effect regression model. The findings revealed that dividend yield and dividends payout does not influence the market share price in the GCC market. Therefore, they do not affect the GCC banks’ market share price, thus the findings of the study support the dividend policy irrelevance theory. The study recommends that managers in the GCC banks should focus on and emphasize allocating more funds in investment rather than paying dividends. The findings have important practical implications for the policymakers on dividends in the GCC banks due to unstable and inconsistent trends of dividend payments and making it difficult for shareholders on dividend policy decisions predictions

Websites Visits and Financial Performance for GCC Banks: The Moderating Role of Environmental, Social and Governance Performance

The volume of services provided through websites increases over time, particularly in the banking sector. It is challenging to develop banking services to achieve optimal financial performance. As a result, this article aims to investigate the impact of bank website visits on the financial performance of the Gulf Cooperation Council (GCC) banking sector, taking into account the moderating role of the environmental, social and governance (ESG) performance. The article is based on an empirical analysis through a content analysis approach based on a sample of 64 GCC banks from 2014 to 2020. The findings showed that the frequency of website visits significantly affects the financial performance measures of banks, such as return on assets (ROA), return on equity (ROE), market value (Tobin’s Q), net interest margin (NIM) and return on investment (ROI). In addition, the ESG performance of banks attracts more website visitors and enhances them with the idea of dealing with banks that enhances financial performance. The findings indicate that banking websites as a tool for public relations attract visitors and thus turn them into customers by changing the behavioural intention of individuals, which affects their decisions to engage in banking transactions and thus raises the level of financial performance of banks. To the best of our knowledge, this is the first study that examines the relationship between website visits and financial performance. Therefore, it bridges the research gap in this field and thus provides a roadmap for more potential research ideas in the future.

Effect of COVID‐19 on the performance of Islamic and conventional GCC banks

This paper investigates the effects of the COVID‐19 crisis on the performance of 49 listed banks in the Gulf Cooperation Council (GCC) countries, during the period from the first quarter of 2017 through the third quarter of 2020. The findings reveal that GCC banks were negatively affected by the pandemic. However, Islamic banks have performed better than conventional banks. The results also show that the banks in Saudi Arabia and UAE were affected more than the banks in other GCC countries. We also show that Islamic banks which are government‐linked, those that are large and those with high loan ratios were more affected by the pandemic. Overall, we argue that Islamic banks can play a significant role in the recovery of GCC countries from the consequences of the pandemic.

Determinants of Basel III Risk Disclosures: The Case of Gulf Cooperation Council Public Banks

Manuscript Type: Research paper Research aims: The purpose of this paper is to investigate and examine the determinants of risk disclosure practices under Basel 3, Pillar 3 (revised 2016 version) requirements of the top 50 listed banks in the Gulf Countries region (GCC). The study covers the period 2016-2019. Design/Methodology/Approach: The present study is based on a content analysis approach to allow the measurement of risk disclosures. Six risk disclosure categories were identified as the major sections regarding this particular type of reporting. The analysis covers both quantitative and qualitative data that had been hand collected from the annuals reports and Pillar 3 risk disclosures reports. From a regulatory perspective, the study refers to the most relevant international accounting standards, namely, Basel III Agreement Pillar 3 (2016 revised version), and IFRS 7. Research findings: It is expected that the GCC major banks, even though they must comply with the same risk disclosure regulation, will demonstrate specific disparities in their risk reporting. The results of the study suggest that Basel III risk reporting is significantly determined by size, leverage, cross listing, and government ownership. Theoretical contributions/Originality: The present study contributes to the literature by documenting the level of compliance of the top GCC banks with the recent BCBS risk disclosure requirements, and by providing empirical evidence regarding the quality of the released risk disclosures and its potential determinants. Another major contribution of the paper is the development of a self-constructed disclosure index that reflects the most recent Basel III disclosure regulations (Pillar 3, 2016 version). Practical implications: The findings of this study could be appreciated from different angles. From a regulatory perspective, this study might be insightful to GCC baking regulators in term of developing appropriate policies that will bring the banks to responsibly and professionally adopt an acceptable level of risk disclosure. At the global level, the findings could be insightful to the IASB concerning the degree of compliance of the banks in the region with IFRSs related to risk reporting. Thus, it can help the IASB consider institutional differences among countries when revising its pronouncements. Research limitations/Implications: The findings of the present study would be understood in light of some limitations. First, in the present study, we considered only the top 50 GCC listed banks, which could impede the generalisation of the results from the content analysis and the regression on the rest of the banks in the region. Second, we were interested in this research about the implementation of the new 2016 market discipline Pillar 3 disclosures requirement. Expanding the time frame of the study could reveal additional insights into risk disclosure practices. Keywords: Corporate Risk Disclosures Basel Committee on Banking Supervision (BCBS), Basel III, Pillar 3, Market Discipline, IFRS 7, Gulf Cooperation Council (GCC) JEL Classification: G21,G28,G32,G34,G38

Bank-Specific and Macroeconomic Determinants of Bank Liquidity Creation: Evidence from MENA Countries

Abstract This study measures liquidity creation within a sample of 153 banks operating in 12 Middle Eastern and North African (MENA) countries from 2008 to 2017. We found that these banks created a total of $461.32 billion in liquidity in 2017, approximately 1.51 times the total liquidity created in 2008, mainly driven by commercial banks in Gulf Cooperation Council (GCC) countries. We also conducted an econometric analysis to investigate the internal and external factors affecting bank liquidity creation, applying a Fixed Effects model and the new Method of Moments Quantile Regression (MMQR). The results show that, among bank-specific factors, bank liquidity creation in MENA countries is related to capital, size, bank risk, deposits and profitability whilst market concentration does not appear to play a significant role. Regarding macroeconomic factors, inflation, unemployment, savings and monetary policy explain the variations in bank liquidity creation.

Bank Efficiency and Oil Price Volatility: A View from the GCC Countries

The study investigates the banks' efficiency in the Gulf Cooperation Council (GCC) countries' members (GCC). The efficiency of the banking sector is a cornerstone in the financial development of a country. It has also become a prominent label in both economic and financial lexicons due to the lucid importance of the financial intermediation function it provides. The banking industry is considered the backbone of the financial system in oil exporting countries of the GCC region. In general, the advancement and stability of the banking sector are inextricably related to the total economic output as measured by the GDP and to the stability of the financial system in particular. This study aims to evaluate how efficient banking is in the six countries of the GCC bloc, and to assess the effect of the oil price shock in 2014 on the bank’s efficiency in these countries. This study employs the 2-stage Data Envelopment Analysis (DEA) methodology for this aim. This model assigns efficiency scores for GCC banks over a period of time from 2008 to 2016 in the first stage. The second stage of the model regresses the aforementioned efficiency scores against a variety of financial and macroeconomic variables to depict the main determinants of bank efficiency and to assess the banking sector's resilience to global shocks as well as to macroeconomic conditions. The empirical outcomes of this study indicate that the global financial crisis (GFC) in 2008 and the oil price shock in 2014 had a significant negative impact on the efficiency scores of the GCC banks. The findings also show that domestic macroeconomic indicators have a greater impact on bank efficiency than institutional or bank-specific variables.JEL Classifications: E6, E44, Q4, G21 Doi: 10.28991/ESJ-2022-06-03-07 Full Text: PDF

The effect of financial technology on the sustainability of banks in the Gulf Cooperation Council countries

The purpose of this study is to investigate the influence that financial technology (FinTech) companies have on the soundness of bank finances. Using a sample of 480 bank-year observation from an emerging market of the Gulf Cooperation Council (GCC) over the period of 2006–2021, we find that the development of FinTech firms over time increases bank financial stability. The study used the Refinitiv Eikon and Fintch Connect databases to measure variables. When we conduct sub-sample analyses by bank size, bank type, and level of corporate governance, we find additional evidence that supports the hypothesis that FinTech companies have an effect on the financial stability of banks. The findings are consistent with a wide variety of model specifications, indices of financial stability, and applications of FinTech. This study is unique and contributes to the extant literature by offering new evidence on the effect of FinTech on the sustainability of banks in GCC

Tone, readability and financial risk: the case of GCC banks

PurposeThe authors investigate the impact of disclosure tones and financial risk on the readability of annual reports in the banking sector. The authors also examine the moderating effect of banks' financial risk on the tone–readability relationship.Design/methodology/approachThis study relies on the agency theory and the social psychology theory to formulate its testable hypotheses and explain the empirical findings. It uses a sample of 390 bank-year observations from banks listed in the Gulf Cooperation Council (GCC) Stock Exchanges during the period 2014–2019. It also employs random effect regressions to analyze the data and to examine the reverse causality/endogeneity in order to obtain robust findings.FindingsThis study’s results demonstrate that easy (difficult) to read annual reports is significantly associated with positive (negative) tone. Bank managers characterized as “too positive/optimistic” and banks with higher financial risks publish less readable annual reports. The results also show that the interaction between negative tone and a bank's financial risk is inversely associated with reading difficulty, indicating that managers prepare easy text to clarify causes of their banks’ high risks, yet they communicate this easy text with a negative tone that reflects their feelings/emotions towards the financial risks of their banks.Practical implicationsThis study’s findings call for the use of a plain English text that bears a neutral tone and urge financial analysts to go beyond the financial aspects of annual reports. They also stimulate policymakers to draft policies, which ensure the presence of audit committee members who possess a broad expertise to uncover the linguistic issues embedded in the annual reports.Originality/valueTo the best of the authors' knowledge, this is the first study dedicated to exploring the tone–readability association in the GCC's banking sector.