Banks in the UAE
Part I: Driving Force
Driving forces are pressures from external factors that influence changes of the strategies by firms within a particular industry. These driving forces have a significant influence on restructuring the operations as well as altering competition in an industry. Driving forces are created within a particular company’s external environment, but more from the immediate environment. The current paper focuses on the driving forces experienced by the banks in the UAE, analyzes how the drivers of change act on the banking industry and finally, determines the best strategies to counter the effects of the driving forces.
In the banking industry in the UAE, there are many driving forces that are experienced from time to time. One of the most key driving forces is innovation in the industry that targets to create tangible influence in the global economy as well as developing the Islamic world. The UAE Minister of Economy, Sultan Al Mansouri, emphasized the need for innovation in the banking industry while addressing the COMSEC Ministerial meeting in Istanbul (Al-jazzazi & Sultan, 2014). He challenged the banks in the UAE to be innovative and develop new innovation centers in the region in order to strive for the competitive markets available in the foreign market.
The nature of the banking industry in the UAE has also been influenced by the banking regulations and the government policies concerning the practices of banking in the UAE. The Central Bank of the United Arab Emirates is responsible for regulating the banking industry through setting standards and formulating policies that are followed by all banks in the industry (Wallace, 2013). The central bank enforced the global regulations that are meant to improve the monetary policy in the United Arabs Emirates. Some of the initiatives are the mortgage regulations, lending restrictions and exposure limits of the banks’ financial statements to government entities, which have led to significant change in the banking industry practices.
Technological advancement in the UAE as well as in the entire world has become a driving force in changing the operations of the banks. Through technological advancement in the banking industry, the UAE banks have managed to accommodate emerging services such as mobile banking, digital currency and banking applications designed by Google, Apple and Samsung. The introduction of digital currency has also made the money transfer processes more secure, fast and affordable to the clients transacting with the UAE banks.
Increased globalization has opened new markets for the UAE banks products. Many of the banks in the UAE have taken the advantage of globalization, particularly, to invest in other countries thus broadening their market share for their products (Wallace, 2013). The UAE government has liberated its markets, thus encouraging foreign investment in the country. As a result, many multinational banks such as Standard and Barclays Bank have invested in one of the leading business hubs in the entire Middle East, Dubai. Due to this driving force of increased globalization, the UAE banks are adopting new marketing strategies for their products in order to remain competitive in the industry.
Despite many changes experienced in the banking industry in the UAE, some of them are more significant to the sector thus qualifying to be reliable driving forces in the industry (Al-jazzazi & Sultan, 2014). The analysis should focus on determining whether the driving forces affect the industry by making it more or less attractive. The driving forces need to be analyzed critically to determine the effects of the forces separately because they may have different impact on the banking industry in the UAE.
The impact of innovation of product market in the banking industry in the UAE has been intense. It has led to the development of new quality products for their clients as well as venturing into new markets around the Middle East. Therefore, the innovative force has led to the positive development and growth of the entire banking industry in the UAE (Wallace, 2013). The driving force of technological advancement has also led to a significant impact on the progressive growth of the banking sector.
Globalization has led to increased foreign investment in the main cities of the UAE: Dubai and Abu Dhabi. These investment initiatives have boosted the economy of the country, hence developing the banking industry, which is one of the main beneficiaries of the economic growth. However, globalization has led to unfair competition from multinational banks that have prevented the growth of the local banks in the UAE. Many of the government policies and regulation standards set by The Central Bank of the UAE have influenced the growth of the banking industry positively.
The banking industry of the UAE has devised strategic changes that are meant to deal with the impact of the driving forces identified (Al-jazzazi & Sultan, 2014). The industry is adopting the transmission of improved monetary policy and development of financial institutions that is meant to ensure that the globalization effects, the market and product innovation and the impact of government policies are dealt with. The banking industry has also developed a corporate strategy of embracing the new technologies in the banking sector in order to remain competitive globally.
Part II: Porters 5 Forces Analysis
Porter’s Five Forces Analysis is very important in the banking industry of the UAE. One of the five forces is threats of new entrants into the industry leading to increased competition (Singhania & Kumar, 2014). Although investment in the banking industry requires a lot of capital, new innovations such as internet bill payment has open new opportunities for entrepreneurs to enter the market. Banks in the UAE are threatened by the increasing number of payment businesses entering the banking sector. Another threat is the entry of other companies such as insurance companies to offer financial services like mortgage and loan services.
Another force is the power of suppliers in the banking industry. The threat posed by the suppliers of capital may seem insignificant, but maintenance of the human capital is becoming challenging. This is because the bigger banks and financial firms drive away the skilled personel, thus leaving the local banks with less skilled staff. Most of the human capital is lured by the huge renumarations in the multinational banks entering the industry.
The power of buyers in also significant because it influences the growth rate of the banking industry. Individual clients do not pose a big threat to the banking industry, but the switching costs of clients from one bank to another is really a threat because many clients opt to remain with their current banks (Singhania & Kumar, 2014). Large corporate clients are more interested in big financial institutions that offer better exchange rates and have good exposure to the foreign capital markets.
The availability of substitutes in the industry is becoming a threat because other non-banking financial institutions are offering the same services as other banks even in a better way. On the lending services, which is one of the main services of banks, a lot of competition is created by Sony, General Motors and Microsoft which offer finances to customers with good loan terms, expecially those buying expensive items.
The last force is competitive rivalry in the banking industry of the UAE. The high competition among banks and other financial institutions has forced many banks to design new products like offering low service rates and investment services (Singhania & Kumar, 2014). However, this move has led to low returns thus forcing some banks to undergo consolidation. The large banks are dealing with the competition by undergoing mergers with small banks instead of investing a lot of capital in the advertisement.