Abstract
This study used Al Ahli Bank of Kuwait to complete research on the effects of the global economic crisis on the financial performance of conventional banks in Kuwait over the period from 2000-2015. The study results show that the global economic crisis does not have a statistically significant impact on the financial performance of conventional banks in Kuwait. However, the study finds out that some macroeconomic conditions such as equity and bank size are very crucial to traditional banks’ profitability. Increasing the owner's equity was found to decrease the impact of the financial crisis on the conventional banks in Kuwait. Lastly, the impact of the global economic crisis on the banks profitability was found to increase with total assets, overhead expenses and the liquidity. To improve the efficiency of operations in conventional banks and limit the impact of economic crises when they occur, the study recommends that entities put a check on their overhead expenses on top of adding to their equity capital.
Introduction
The 2007global economic crisis is perceived as an arrangement of worldwide financial crises that have occurred since the 1970s and began with the subprime of loans in the United States. This financial crisis is the most essential and excellent one among the other money related emergencies as a result of the massive effect it had on the US economy as well as on other real economies on the planet. The timing of the crisis and its effects took a huge toll on the global financial market in a way that even experts could not have predicted. However, it did change the scope of the financial market especially the banking sector as stakeholders embarked on review of their systems and constituting precautionary measures (Mukherjee & Whiteney 2013). This financial crisis happens in nations with grew at a rate that is higher than that of others nations. It has given a wide exhibit of effects to the working and money related execution of numerous banks everywhere throughout the world. Thus, various banks over the world reported monetary misfortunes on their budgetary reports because of their associations with subprime loans in the U.S., on the other hand, were influenced by monetary retreat in their nations. The effect of the financial crisis has even constrained around 123 banks in the U.S. to petition for insolvency in the year, including the Lehman Brothers bank that was never expected to be in the list of banks to fail (Zeitun, 2012).
Looking at markers of business introduction, cost effectiveness, resource quality and solidness of routine and Islamic banks, we discover minimal noteworthy contrasts between the two gatherings. While we find that Islamic banks are more financially savvy in a vast example of nations, this advantage pivots when we concentrate on a specimen of nations with both ordinary and Islamic banks. Henceforth, it is customary banks that are more financially savvy than Islamic banks in nations where both banks exist. We can't locate any noteworthy contrasts in business introduction, as measured by the offer of expense based to aggregate pay or share of non-store altogether subsidizing. Neither do we discover huge contrasts in the solidness of Islamic banks. However, we find that Islamic banks have higher capital-resource proportions. Be that as it may, we do discover some variety of effectiveness and solidness of ordinary banks crosswise over nations with various pieces of the pie of Islamic banks. In particular, in nations where the piece of the overall industry of Islamic banks is higher, conventional banks have a tendency to be savvier than modern banks.
Considering the execution of Islamic and conventional banks amid the late emergency, we discover little contrasts, except that Islamic banks expanded their liquidity possessions in the run-up to and amid the emergency with respect to routine banks. It was such small differences that had a big impact on the outcome of the crisis on both sets of banks (Talla et.al. 2015). This addition clarifies why Islamic banks' stocks performed better amid the crisis contrasted with customary banks' stocks.
Together, our exact discoveries propose that traditional and Islamic banks are more alike than already suspected. Contrasts in plans of action (on the off chance) do not exist by any stretch of the imagination. As such, they don't appear in standard pointers in light of explanation budgetary data. Different contrasts, for example cost proficiency, seem to be driven more by nation instead of sort bank contrasts. At long last, the great execution of Islamic banks amid the late emergency seems, by all accounts, to be driven by a higher precautionary measure in liquidity possessions and capitalization. However, there is no native contrast in resource quality between the two bank sorts. This permits two optional conclusions, which our information don't permit to recognize: off-setting impacts of Sharia-consistent relying upon the plan of action, danger taking and eventually security offset each other, or the working and association of Islamic banks are undoubtedly less not quite the same as that of traditional banks than regularly proliferated.
This being one of the main bank-level investigations of Islamic banks, two vital provisos are set up. To start with, episodic confirmation recommends that there are critical contrasts crosswise over nations regarding how Sharia-consistent items are precisely organized, with some of the banks essentially offering routine items repackaged as Sharia-consistent items. This infers we have to practice alert when deciphering Islamic keeping money with regards to conventional models of monetary intermediation. What's more, there are contrasts crosswise over various Muslim nations in what is viewed as Sharia-agreeable and what is not, which makes it hard to do cross-country correlations. The Sharia factors thus has a huge role to play in any similar practices that in turn make the correlation more visible in the eyes of operators and other players in the market (Talla et.al. 2015). Second, given the distinctive way of routine and Sharia-agreeable items, as talked about in area 2, monetary record and wage proclamation things won’t be totally practically identical crosswise over bank sorts even inside the same nation. In our experimental activity, we depend on Bank scope information that has been subjected to consistency checks by the supplier Van Dyck. In any case, we can't prohibit the likelihood that noteworthy contrasts in proportions got from money related articulations are because of various estimation issues instead of natural contrasts crosswise over bank sorts. At last, our specimen incorporates a couple of Islamic banks which may impact our discoveries and must be cured after some time as more information get to be accessible.
Inspecting the effect of money related financial crisis on banks' productivity is an urgent issue, especially since the late worldwide money related financial crisis influenced fundamentally banks and monetary foundations around the world, principally their profitability. The crisis was a new phenomenon but the need for such a study was long overdue considering the signs preceding the event (Mukherjee & Whiteney 2013). For illustration, clients are occupied with knowing the costs and the nature of the management given by banks. These are emphatically affected by the bank's general productivity. Besides, a consciousness of gainfulness elements makes a difference arrangement producers to figure compelling approaches and regulations for the managing an accounting industry. There have been numerous studies analyzing the results of the worldwide money related financial crisis 2007 on the ordinary managing an account area of various nations.
The consequences of these studies demonstrate that the benefit of the money related establishments has been fundamentally affected by this financial crisis. Nonetheless, in spite of the pertinent scope of writing toward the effect of the budgetary financial crisis on the benefit by Islamic banks and the GCC, this constrained analysis study has attempted to analyze the effect of this financial crisis on conventional banks performance in Kuwait with the focus on Al Ahli Bank. Therefore, the present study is required to fill this hole in the writing.
The purpose of this study, therefore, is to determine the effect of the economic crisis on the performance of conventional banks in Kuwait. The performance of the banks will be seen regarding liquidity from the statement of financial position and also consider profitability from the income statement. All the analysis and data will be extracted from Kuwait.
Literature Review
Countless studies have been done on the effects of the global economic crisis on the operation of banks especially the Islamic banks. A significant portion of these studies was conducted in the developed nations while not very many reviews give proof from developing countries. One of the early studies endeavored to discover the significant effects of the global economic crisis on the operation of banks. Various studies have been conducted that focus on the profitability and liquidity of banks. The profitability and liquidity have been considered concerning the global economic crisis (Zeitun, 2012).
An Islamic bank, just like other banks, is a store taking establishment, which gives all clients rights based on known managing and account exercises, besides obtaining and loaning. On the liabilities side, it activates stores in light of Islamic methods of financing. Moreover, it acknowledges request stores from customers, which are dealt with as interest and insured advances and are insured. On the advantages side, it propels stores on a benefit. What’s more they facilitate misfortune sharing or obligation making premise, as per the Shari'ah.
The determinants of a banks' profitability are separated into two fundamental classes: The principal classification is called inward determinants and the second the external determinants. The fundamental determinants speak to the components that are controllable by the administration. It demonstrates the distinctions crosswise over banks in their management approaches and choices identifying with sources and employments of assets, capital, liquidity, and costs. The fundamental determinants of banks' benefit that are most ordinarily referred to in the writing incorporate liquidity proportions, bank hazard, capital proportions, working expenses, and bank size.
The emergencies related determinant is worried about the effect of the money related emergencies on Islamic keeping money benefit. The monetary decay created by money related emergency influenced the speculation and financing exercises of budgetary foundations including those of Islamic banks. Moreover, it decreased the subsidizing of these banks through lower individual investment funds and declining corporate benefits. Likewise, a decrease in the land markets where these banks have vast immediate and roundabout exposures is additionally another wellspring of danger. At long last, Islamic banks in a few locales may confront hazard on their financing and speculation side of the monetary record because of the emergency impelled unpredictability of value markets where these banks have substantial positions. The relative significance of each of these components shifts by the district. For illustration, the banks in the GCC are more presented to land market hazard, trailed by the danger of global value contracts. Observationally, Zeitun (2012) inspected elements that influence the productivity of Swiss banks over the period from 1999 to 2009 by utilizing the pre-emergency time of 1999–2006 and the emergency years of 2007–2009. Their outcome proves that the budgetary crisis had a critical effect on banks profitability.
Some researchers such as Bourke proposed that there is a positive relationship amongst liquidity and gainfulness. Some studies outline that little measure of assets put in fluid ventures can bring about higher productivity. The study that was led by Molyneux and Thornton (1992) considered banks execution in 18 European nations between 1986 and 1989. Ramesh (2009) found a critical positive relationship between the arrival on value (ROE) and government possession, bank fixation and the level of financing costs in every nation. Bashir in later research on the Islamic banks in the Middle East reported a positive critical relationship amongst influence and advances to resource proportions and bank execution. He additionally presumed that remotely claimed banks are more productive than the non-outside possessed ones. Other studies on the subject of banking and the global economic crisis showed that keeping money with bigger resources is more gainful.
There is a positive relationship between size and bank productivity for the European keeping money industry. Kosmidou (2008) considered the determinants of execution for 23 Greek banks amid the period 1990-2002 (Zeitun, 2012). In his study, the arrival of large resources is utilized as bank performance measure. Expense-to-pay proportion, value to aggregate resources, bank's credits to client and transient subsidizing, advance misfortune stores to gross advances and the bank's total resources were utilized as inward determinants. Then again, he used the yearly change as a part of GDP, swelling rate, development of cash supply, securities exchange capitalization to aggregate resources, all out advantages for GDP, and fixation as outer determinants of execution. The outcomes propose that ROAA is connected with all around promoted banks and with lower expense- to-salary proportions. Additionally, both size and the development of GDP were decidedly identified with banks execution, while expansion is negatively affected banks' execution (Hassan & Handy, 2010).
Banks can withstand an emergency if they are working in the most efficient way since it lessens the expense of money related intermediation through exchanging supports proficiently from savers to makers. This is impressively vital amid the monetary emergencies since they have less benefit to retain future misfortunes. Banks which neglect productivity amid the budgetary emergencies will be driven out of the business sector rapidly.
Scale efficiencies can build benefits as the unit expense of generation falls with expanded size. All the more absolutely, it can enhance benefit by diminishing expenses per unit of yield for a given arrangement of yield amounts and data costs. Besides, it might build benefits through changes in benefit proficiency that includes unusual mixes of inputs and yields coming about because of bigger size. Finally, it might enhance benefits through the activity of extra market power in setting costs (Beck, 2010).
The relationship between monetary conditions and the budgetary segment execution is very much archived in the writing. Amid patterned downswings, loaning exercises diminish. This is because of the way that such periods are regularly connected with uncertainty. So also, procurements held by banks will be higher because of the crumbling of the nature of credits. Then again, the interest for credit and securities exchange transactions would be fortified significantly amid ideal financial conditions. The interest edge may enlarge. This way, incomes become quicker than costs prompting expanded benefits. Moreover, venture development may build the banks' wobbly sheet exercises which may broaden their benefit while the inverse may remain constant amid monetary stoppages (Ramesh, 2009).
A study by Delis and Papanikolaou (2009) observed that bank size, industry focus, and venture environment positively affected bank's productivity. Ben Naceur and Goaied (2001) used information from Tunisia to look at the determinants of the Tunisian banks' execution amid the period 1980-1995. Their outcome recognized that work and capital profitability; an abnormal state of store records on resources, lastly, fortified value have a positive effect on the banks execution. Master et al. (2002) gave proof from Malaysia. They examined the elements that influence banks performance and gainfulness for seventeen Malaysian business banks, over the period 1986-1995. They utilized capital ampleness, liquidity and administration costs as internal variables. Firm size, proprietorship, and outside monetary conditions were used as outer determinants. The outcomes demonstrated that administration costs had an enormous positive impact on bank's benefit. The outcomes additionally proposed that high premium results in low bank gainfulness. In spite of that, expansion positively affected bank execution (Zeitun, 2012).
Ahmed and Khababa (1999) analyzed the determinants of the keeping money area in Saudi Arabia. They utilized the ROA, ROE, and the rate of progress in per income offer as benefit measures. They found that business hazard and bank size were the fundamental determinants of the Saudi banks' execution.
A study by Eichengreen and Gibson (2001) recommended that bank's size positively affected productivity to a particular breaking point. Be that as it may, the size impact could be negative because of the organization. Akhtar et al. (2011) utilized a specimen of Islamic banks in Pakistan over the period 2006-2009 to research the impact of bank-particular variables on bank's productivity using a multivariate relapse models. They found that outfitting and capital sufficiency proportions had a critical positive effect on bank execution. Then again, bank size influenced execution contrarily. However, this was inconsequential.
Srairi (2009) analyzed the impact of bank qualities, macroeconomic variables, and money related structure on banks gainfulness for customary and Islamic business banks working in GCC nations for the period 1999–2006. Their outcomes have demonstrated that the productivity of Islamic and conventional banks is influenced by operational proficiency, capital ampleness, and credit hazard. The experimental results uncovered that macroeconomic variables, except for swelling rate, emphatically changed benefit.
Olson and Zoubi (2008) utilized 26 budgetary proportions to look at Islamic and customary banks in the GCC nations over the period 2000–2005. They found that Islamic banks are less efficient and working with more danger contrasted with conventional banks. The item structure in IB is not quite the same as CB as it is considered as resource supported instrument financing. Store reserves in CB depend on a foreordained loan fee while store reserves in Islamic bank are alike as they share distinctive sorts of danger. Moreover, Islamic banks are not presented to same kinds of benefits that considered hazardous and experienced misfortunes by CB.
Chong and Liu (2008) explored whether Islamic saving money is not quite the same as routine managing an account utilizing Malaysian information. The observational results recommended that Islamic stores are not altogether different from regular stores. Likewise, they uncovered that just an insignificant part of Islamic bank financing is entirely PLS-based and that Islamic stores are not premium free, but are rather nearly pegged to regular stores.
Masood et al. (2009) distinguish the determinants of business banks' gainfulness in Saudi Arabia for the period 1999–2007. Their outcomes show that operational effectiveness, gaining resources for stores; capital ampleness proportion, GDP development, and money related improvement altogether influence banks productivity. Then again, credit danger and expansion irrelevantly change gainfulness. Haron (2004) analyzed the effect of productivity determinants on Islamic banks execution. He found that inside elements and outer variables were correspondents to Islamic banks salary and gainfulness.
Pasiouras and Kosmidou (2007) utilized information from 15 European nations for the period 1995–2001 to look at the various factors that influenced foreign bank's gainfulness. They examined how a bank's particular variables, money keeping environment (GDP development, market capitalization (MC) and bank resources impacted on business households and remote banks. Their study also focused on how securities, exchange capitalization (SMC), GDP focus, and swelling rates influence the gainfulness of business households. They found a unique relationship between these variables and banks execution.
As indicated by the hypothesis, proprietorship structure could be identified with bank's gainfulness. The association between proprietorship structure and execution has been a continuous open deliberation in the corporate account writing. In any case, the outcomes are blended. Barth et al. (2004), for instance, found that private banks are gainful. Then again, Molyneux and Thornton (1992) found a unique positive relationship between proprietorship structure and bank benefit.
Nonetheless, a feeble unfavorable relationship was found amongst proprietorship and execution in a study led by Bourke (1989). Micco et al. (2004) gave proof from creating nations about the presence of a substantial relationship between proprietorship structure and bank execution. They found that outside claimed banks were described by higher gainfulness took after by private partners. Banks claimed by the government were observed to be the most reduced gainful.
Then again, Gupta (2005) result demonstrated that non-controlling shares of state-claimed firms held secretly had a constructive outcome on banks productivity in India. The outside determinants are the macroeconomic variables that influence the entire economy and considered crucial determinants of execution. A few studies have reported a positive relationship amongst GDP and bank productivity.
Revell (1979) talked about the relationship between bank gainfulness and swelling. He found that the impact of expansion on bank productivity differs relying upon how quick the level of increment in banks working costs is, besides the rate of swelling. Perry (1992) expressed that expansion swayed banks' gainfulness while relying on whether it is entirely foreseen or not.
Methodology
Method
The studies preceding this study have considered the effect of the global economic crisis on the profitability of Islamic banks. These studies have proved and confirmed the suitability of the linear regression model in producing results. This encouraged the adoption of the linear regression model to analyze the results of this study on the effects of the global economic crisis on the conventional banks in Kuwait with a case study of Al Ahli Bank. This study uses pooled estimation models, in which the linear functional form is applied to examine the interrelation between measures of bank profitability performance and the determining factors.
Model and Definition of Variables
The study used a linear regression model of the form below:-
Y=BX+U,where Y is a matrix with series of multivariate variables (dependent),B is a matrix containing the estimated regression coefficients.X is a matrix of independent variables (this is a logical variable 0 before crisis and 1 after crisis),U is a matrix containing errors
The regression coefficients to show the effect on profitability and liquidity were selected from the balance sheet and analyzed across all the years.
Data and Sample
The study utilized Al Ahli Bank from Kuwait in the analysis. Data from Al Ahli Bank was pooled from the balance sheet and the statement of financial position over the years from 2000 to 2015. The study puts into use the pool sample analysis technique because of its relative benefits. The pooling of data generates lots of information for the study, reduces the degree of collinearity among the study variables, improves the efficiency and increases what is referred to us the degrees of freedom.
Data Analysis and Hypothesis
The regression analysis performed including all variables however a hefty portion of them observe to be unimportant. Various confinements were forced on the general model. Its legitimacy was tried utilizing the F-erasure test. The procedure was repeated until the last model that best speaks to the study under scrutiny was reached.
The results of the regression done on Al Ahli Bank of Kuwait are as follows:-
Analysis
The final regression model has R2 of 0.473. This implies the model clarifies very nearly 47% of the variety in the banks' benefit measured by ROAA. The high likelihood of the F measurement (0.000) demonstrates that the autonomous variables are together critical in clarifying the variety in the banks' benefit. Besides, the VIF for the variables examined went somewhere around 1.147 and 3.909. All are far beneath the acknowledged level (10) recommended by Gujarati (2004). This shows multicollinearity is not risky in the present study.
Of course, the money related emergency Dummy variable is found to affect negatively conventional banks' profitability despite the fact that its effect is factually inconsequential as per Boiker (1999) on profitability. This may be ascribed to the preclusion of research which limited conventional banks from managing some instruments which considered principal patrons of budgetary emergency, for example, Collateralized Debt Obligation and credit default swap. The assistance helps in guaranteeing that the assets are utilized for their expressed purposes. At long last, inaccessibility of supporting instruments for bank budgetary establishments keeps them from the terrible outcomes of the money related emergency.
The Gross Domestic Product is identified with banks' ROAA, and its effect is factually critical. The positive effect of Gross Domestic Product in banks' productivity gives backing to the contention of the relationship between monetary development and budgetary segment execution which is in accordance with comparative studies that have concentrated on banks' benefit. Concerning the effect of size on banks' benefit, the study uncovers that LTA has a positive and factually critical effect on banks' gainfulness. This study demonstrates that conventional banks are profiting from vast size through enhancements in benefit productivity that include prevalent blends of inputs and yields coming about because of bigger size, which is predictable with the findings of Boiker (1999). Moreover, Equity has a positive and measurably critical effect on ROAA. This may show that expanding value diminishes expenses, and results in higher profit for resources. Then again, Dummy Equity has an adverse and statically negative effect on ROAA. This may clarify the irrelevant effect of money related emergency in Islamic banks' productivity as they hold a more elevated amount of capital.
The effect of the association of the overhead with a budgetary emergency is certain and statistically noteworthy. The result implies the effect of the money related emergency on banks' productivity increments with the expansion in overhead costs which may suggest that conventional banks are working in the most proficient way since it diminishes the expense of monetary intermediation through exchanging finances productively from savers to makers.
Moreover, Dummy LTA variable has a positive and factually huge effect on banks' gainfulness. This correlation implies the effect of the economic crisis on conventional banks' profitability increments as the measure of the bank increments. This may be credited to the way bigger banks have more speculation regarding nations which are influenced more by the budgetary emergency. However, the vast majority of the ventures for smaller banks are locally affected.
Conversely, the effect of the cooperation of none enthusiasm procuring resources with monetary crisis (Dummy NER) is negative and statically critical. This may credit to the way that Islamic banks hold more liquidity than would some way or another be esteemed important before the emergency and when the emergency began they build their liquidity which brought about diminishing their productivity.
Conclusion
This study focused on the effect of the global economic crisis on the performance of conventional banks in Kuwait. The study took the case of Al Ahli bank in Kuwait. The study covered the period between 2000 and 2015. The performance of Al Ahli was checked in terms of the profitability of the bank and was measured in relation to ROAA. The study finds that:
1) The global economic crisis has no significant effect on the Conventional Banks' performance in Kuwait.
2) Favorable macroeconomic conditions enhanced Islamic banks profitability. Moreover, both bank size and equity capital are important factors in increasing Islamic banks' profitability. Furthermore, increasing owners' equity decreased the impact of financial crisis on Islamic banks profitability.
References
Ramesh, M. (2009). Economic Crisis and its Social Impacts: Lessons from the 1997 Asian Economic Crisis. Global Social Policy, 9(1 Suppl), 79-99. http://dx.doi.org/10.1177/1468018109106886
Zeitun, R. (2012). Determinants of Islamic and Conventional Banks Performance in GCC Countries Using Panel Data Analysis. Global Economy and Finance Journal Vol. 5. No. 1. March 2012. Pp. 53 – 72
Beck, T. Et, al. (2010). Islamic vs. Conventional Banking. Business Model, Efficiency and Stability. Policy research working Paper.
Mukherjee, T., Whiteney, G. (2013). Review of Financial Economics.
Talla, M. et.al. (2015). Performance of Islamic banks and conventional banks before and during economic downturn. Investment Management and Financial Innovations, Volume 12, Issue 2, 2015
Hassan, A. & Handy, D. (2010). The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study. Monetary and Capital Markets Department & Middle East and Central Asia Department
