Home Solutions comparative study between public and private sector banks
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impact of Derivatives trading on emerging capital marketimportance of customers in mergers & acquisitionimportance of micro finance in developing economymerger & acquisition – conceptual frameworkmerger & acquisition – avoiding path of decaythere are a list of 6 topics you are may choose one of them and i would prefer it if the paper was based on the Saudi Market.regarding the sources I choose 10 but also you could list more or less if it is necessary
This paper seeks to establish a difference between investment and commercial banks. Literature on banks has mostly concentrated on the credit risk taken by banks, or encroachment into the functions of investment banks by commercial banks. However, no studies have attempted to understand what happens when an investment bank undertakes traditional roles of a commercial bank, such as lending. This paper seeks to understand the difference between the products and lending habit of commercial and investment banks.
Qualitative and quantitative analysis tools are used to deconstruct the data. Data from five commercial and five investment banks are gathered and are examined using ANOVA and regression analysis. The result of the research shows that commercial banks have more product offerings than investment banks and that there exist a significant difference in risk taking behavior of the two types of banks.
The research is restricted in scope as it leaves areas unattended. Lending propensity can be studied with respect to other variables such as interest earnings, interest charged on loans, duration of maturity of the loans, and so on.
In 2006, the investment-banking arm of the Saudi Arabian banks split from the commercial banks. Capital Market Authority was set up to regulate the operations of the investment industry. In 2007, CMA approved the first investment bank, NCB Capital. The demand for capital loans from the expanding real estate sector and large infrastructure projects in Saudi Arabia was the driving force behind the expansion of the banking sector. Consumer lending in Saudi Arabia has shown a robust growth since 2009 (“The Report: Saudi Arabia 2014” 84). In 2013, a study on the banking sector conducted by AlJazira finance shows that there has been a growth in the sector even though the global economy and the macroeconomic environment were challenging. Lending in the Kingdom was believed to have grown and the average bank lending to the public and private sector showed a 16.7% year-on-year increase in 2013 (“The Report: Saudi Arabia 2014” 84).
The report shows a growth prospect in the country in client lending because of the increase in the borrowing capacity of the people. Further, lowering of interest rate for retail loan in order to increase penetration (interest rate is 12% in Saudi Arabia as compared to 19% in the UAE and 55% in Europe) has made the market more attractive to borrowers (“The Report: Saudi Arabia 2014” 84). The question that arises is which banking sector will drive the growth – commercial banks or the industrial banks. Some industrial banks, for example the real estate investment companies, have shown a steady increase in the contribution in total consumer lending which, according to the IMF report, has increased by 25%. One reason for the growth in the consumer lending market is the rise in the local salaries and the expansion of consumer credit provides extensive opportunity to the Saudi banks to expand their loan books. Most of the Saudi banks have provided strong growth rates indicating a rise in their loan books in 2015 (Spong par. 3). The report points out that most of the banks such as National Commercial Bank, Samba Financial Group, Saudi Hollandi Bank, and Sabb have posted a growth in their profit (Spong par. 2). The only bank that has shown an 11% decline in 2014 was Al Rajhi Bank (Spong par. 2).
The report also suggests a decline in the expansion of the consumer lending market in the country in 2013. This is due to the bonus salary paid to the people and slowdown of the infrastructure projects (Spong par. 7-8). However, banks believe that the government infrastructure projects are the main area where lending will grow. The growth in the consumer lending market raises inquiries regarding the structure of the market and the loan share of each kind of banks. Here, kinds of banks imply commercial and investment banks. In 2016, the Saudi banking sector has shown a continued growth lending market as institutional lending in the infrastructure sector requires $10 million from banks to finance their projects because of the fall in oil prices (Parasie par. 1). This shows an imminent boom in the lending market in the country. The banks operating domestically in the country expect to expand their lending. Further, both commercial and investment banks are competing in the lending market in the country. This paper, therefore, tries to gain a better understanding of the intricacies of the Kingdom’s banking industry. It will compare and contrast the lending market for the banks that are segregated as commercial and investment banks.
The Saudi banking sector is divided into two distinct banking systems – the commercial and investment banks. Both banks are engaged in the lending market in the Kingdom. Investment banks are those banks that operate in various areas such as retail business such as real estate lending and insurance trading. On the other hand, commercial banks are the ones that provide financial service to individual and/or group of clients. In order to understand the mechanism of these sector’s operations, it is necessary to understand the difference between the two. A universal banking model is one wherein a commercial bank can pursue the functions of both the commercial and investment bank, while a separate banking system is one that makes a distinction between the two. In this case, separation of roles occurs.
However, in the recent years, commercial banks have encroached into the traditional underwriting function of investment banks. Thus, the entry of the commercial banks in the underwriting market has affected the prices of the bond issues, underwriting fees, etc. (Fang 2735) Invest market plays a critical role in the capital market to bridge the gap between firms looking for finance and investors eager to invest. Such intermediation function is important as it helps to reduce the transaction cost due to the investment banks’ specialization is sales and marketing of securities (Fang 2729). This role is crucial as it creates symmetry between the firms and the investors. Investment banks are the best possible tools to reduce the asymmetry that plagues the capital finance market. Financial institutions can provide both banking and underwriting services to its clients because of its entry in the investment bank’s arena (Drucker and Puri 2763). In recent years, it has been increasingly common for both commercial and investment banks to provide loans as well as underwrite for their customers. This raises interesting questions regarding the lending services provided by the commercial and investment banks. Research states that concurrent underwriting and lending may be profitable to the financial institutions (Drucker and Puri 2764). First, concurrent transactions may ensure efficiency gains as the banks deliver a joint service to the customer and second, costs of the service may be lowered due to informational economies (Drucker and Puri 2764).
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