The Determinants of Bank Performance in Kuwait
Abstract
The aim of this paper is to determine the measures of banking sector profitability of Kuwait and then see the impact of internal and external determinants on the performance of the banking sector of Kuwait. Several variables are used to measure the performance of banking sector in this study, the impact microeconomic and macroeconomic determinants will be analyzed with relation to Return on Assets (ROA) and Return on Equity (ROE). However, answering the research questions will help in the selection of independent variables. It has been planned qualitative, and quantitative both research analysis techniques will be deployed for the assessment of the data, and data will be gathered from both primary and secondary sources. It will allow to make comprehensive analysis for the research study. The overall research will present great insights to students, researchers, and policy makers of the banking sector.
Introduction
The banking sector is amongst the oldest sectors and a major player that contributes to the development of the economies of countries. During the last two decades, the immense operational transformation has been experienced in banking sector worldwide. The domestic factors affect the performance and structure of making industry worldwide (Athanasoglou, Brissimis & Delis, 2005). However, the banking sector of Kuwait has been different from other banking industries in the world. Banking sector of Kuwait is one of those industries that contribute immensely to the progress of the country’s economy. The role of banking sector in all countries has been and will remain vital in general in the financing economic activity and in particular in other segments of the market. A profitable and stable banking sector as compared to the weak one is better able to survive from pessimistic shocks and contribute to the financial system’s stability. Due to these reasons, the factors that influence the banking sector performance have gained the interest and attention of bank management, financial market, supervisors, and academic researchers. Therefore, it is essential to determine the factors that can affect the performance of banking sector of the country.
Factors that affect the banking sector performance are also known as the determinants of the banking sector. Several factors that influence the banking industry performance and these determinants can be divided into two categories namely internal determinants and external determinants. Internal determinants that can affect the performance of banking industry are also known as microeconomic factors. Internal factors include size, capitalization, liquidity, credit quality, efficiency, control, degree of diversification, amount of bank deposit, governance, and the market share (Beltratti & Stulz, 2009; Demirgüç-Kunt & Huizinga, 1999; Dietrich & Wanzenried, 2011; Cornett et al., 2011; Garoui, Sessi & Jarboui, 2013). However, external determinants of bank performance that also known as macroeconomic factors include inflation, GDP growth, tax rate, market concentration, maturity of banking sector, and the stock price (Garoui, Sessi & Jarboui, 2013; Naceur & Omran, 2011; Staikouras & Wood, 2004; Bernake & Gertler, 1995; Naceur & Kandil, 2009; Wong et al., 2008).
Banking industry profitability is a measure of banking sector performance and expressed as a function of external and internal determinants. For measuring the profitability, several measures are used by researchers and analysts. Such as Return on Assets (ROA), Return on Equity (ROE), Return on Average Assets (ROAA), Return on Average Equity (ROAE), and economic added value (EAV). However, the most common and widely used measures by researchers and analysts include Return on Assets (ROA) and Return on Equity (ROE) (Bonin, Hasan, & Wachtel, 2005). These financial measures are quantifiable and quantitative and can help researchers in measuring the performance of the industry more accurately as compared to any other measure. Naceur and Goaied (2001), in their research, analyzed the performance of deposit banks of Tunisian and considered portfolio composition, capitalization, and productivity as independent variables and found their impact on banks’ performance by considering return on assets (ROA) as dependent variable and measure of performance rather selecting any other variable as a measure of banking industry profitability.
Research aim:
The aim of this research is to analyze the impact of some internal and external factors on the performance of banking industry of Kuwait. In other words, the purpose of the research is to analyze the factors that determine the performance of banking industry of Kuwait and how the performance of the industry is affected by macroeconomic and microeconomic factors.
Research problem:
It has been determined that banks all around the world after the recent financial crisis have started improving the capabilities of measuring their performance and determining the factors that affect the banking sector performance. The topic of measuring the performance of banking industry has gained high importance from researchers (Seiford & Zhu, 1999). However, in general in Gulf, very little efforts have been done for measuring the performance of banks and more specifically in Kuwait and the research on the factors that affect the banking industry performance are under research as well (Ayet, Yasin & Khatib, 2015). Therefore, it has been decided that the factors that influence the performance of Kuwait banking sector are determined and through the utilization of the combination of some internal and external factors, the impact is analyzed. It will expand the ground for researchers and enhance the understanding of the factors that can make an influence on the banking sector of the Kuwait.
Scope of the research
Each study contains scope and is conducted with the aim of benefiting the community. This research will be beneficial for potential banking sector employees, policymakers, and investors. It will help potential banking sector employees in understanding the factors that can affect the performance of banks in the country. It will help policy makers in making appropriate policies and take preventive measures. However, investors can have an idea that what factors and how they can influence the banking sector that will help them in making investment related decisions.
Research questions
For the attainment of the purpose of the research, the study will answer some specific questions that will enable research to complete the study successfully and make a logical conclusion. These questions are as follow:
Q1: What external factors affect the banking sector in Kuwait most?
Q2: What internal factors influence the performance of banking industry in Kuwait?
Hypothesis
H0: External factors do not affect the performance of banking sector in Kuwait
H1: External factors affect the performance of banking sector in Kuwait
H0: Internal factors do not affect the performance of banking sector in Kuwait
H2: Internal factors affect the performance of banking sector in Kuwait
Methodology
Sampling technique
Sampling technique is an important and integral part of research methodology. It involves the selection of people with which the study will be conducted. It has been decided that convenience sampling technique will be used for the collection of the data. Some banking sector employees will be interviewed, and questionnaire-interviewing approach will be used. The questionnaire will be based on the combination of open ended and close-ended questions.
Data sources
There are two types of data sources, primary data, and secondary data. Both data collection sources will be used to gather appropriate amount of data that will provide the feasibility of making logical and up to date accurate conclusions. The primary data will be gathered by distribution questionnaires between banking sector employees of Kuwait; the interview of approximately 35 employees will be taken. However, the secondary data of 30 banks will be considered and gathered from secondary sources.
Research techniques
Two major research techniques can be used to determine the effect of internal and external factors of the performance of the banking industry of Kuwait. The research will use both qualitative and quantitative research analysis techniques.
List of References
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