Oil price and bank performance in the Middle Eastern oil exporting countries

Abstract

Banks as the most evident financial institutions which provide a range of financial services in their primary role as intermediary from lenders and borrowers of money to sophisticated tools concerned with credit and liquidity provision, risk management and remittance of funds play a vital role in the economy of countries. Measuring the performance of banks, and identifying the factors which impact it, is an issue of major interest for regulators, policy makers, stakeholders, investors and the general public. Oil price movement as an external factor influencing the performance of banks, may affect macroeconomic events which, in turn, influence cash flows significantly in the finance and banking industry. Examining the performance of banks and how oil price movement impact their performance significantly those operating in oil exporting countries, is of interest of bank managers and policy makers. It will help top level managers of banks to be aware of relationship between oil price movement and the performance of their banks and will help them in formulating better policies and strategies in taking on opportunities and avoiding possible risks which this movement may cause. Moreover, it will help policy makers in oil exporting countries to understand how the banking industry of an oil exporting country can reap benefits from economic booms as a consequence of an increase in the price of oil. Therefore, this thesis attempts to investigate the impact of oil price movement on the performance of banks under different operational styles in oil exporting countries. The sample is consisting of 98 commercial, investment and Islamic banks in eight Middle Eastern oil exporting (MEOE) countries during the period 2000-2011. The research applies a two-stage Data Envelopment Analysis to examine the impact of oil price movement on performance of banks. In the first stage, four different efficiency scores of banks operating in the MEOE countries are derived and compared. The empirical results suggest that overall, MEOE banking industries mostly suffer from poor usage of and mal-location of resources by management to produce outputs, rather than a failure in operating at the most productive scale. A low level of overall technical efficiency in the MEOE banking industry means that management has poor skills in controlling operating expenses, marketing activities, absorbing deposits and the monitoring and effective screening of borrowers. In the second stage, to find out the impact of oil price movement on the performance of banks, technical efficiency scores obtained from the first stage are regressed over the oil price movement variable and environmental variables. The empirical results show that while oil revenue impacts the efficiency of the banks directly, positive oil price shocks impact efficiency of banks indirectly, and through inflation and economic growth. These findings suggest that when there is an increase in the price of oil, banks operating in oil exporting countries will derive benefit from the surplus income injected into the economy and their performance will be enhanced.