Assessing the Effect of Dynamics of Oil Prices on Banking Sector Profitability: Evidence from UAE
DOI:
https://doi.org/10.22452/IJIE.vol18no2.10Keywords:
Oil price, Oil-exporting country, Loan loss provisions, GCC, UAE, Banking sector, ProfitabilityAbstract
This study investigates the impact of oil price dynamics and other
determinants on the profitability of banking sector. The analysis covers a six-year
period, from 2017 to 2022, utilising panel data methods. The focus is on the United
Arab Emirates’ banking sector, examining 10 banks, comprising both conventional
and Islamic financial institutions. The random effects model results reveal a significant
positive relationship between oil price dynamics and bank profitability, affirming the
economic importance of oil. Loan loss provisions and leverage ratios exhibit negative
and significant effects on profitability, underscoring prudent risk management needs
and balanced leverage management to ensure sustained profitability. Deposit growth,
deposit ratio, and income diversification positively and significantly influence bank
profitability, reflecting opportunities to bolster performance. The study also uncovers
a negative and significant correlation between cost efficiency and bank profitability,
indicating the significance of cost efficiency in determining the profitability of the UAE
banking sector. The findings have strategic implications for stakeholders to capitalise on
oil revenue flows while supporting policies that account for asset quality, operational
efficiency, and revenue diversification to drive long-term profitability and stability in the
banking sector. The study suggests that future research should expand the sample size to
include the GCC banks, in order to more comprehensively examine the effect of oil prices
on banking sector profitability.
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