The UAE conventional banking market is not a concentrated market, as market concentration expressed as Herfindahl Index (HHI) is 1000, the Dubai chamber has recently conducted a study to assess the structure of the UAE banking sector in comparison to the GCC, to assess the efficiency of the UAE banking sector in comparison to the GCC and to examine the relationship between performance, market concentration and efficiency of the banks. Saudi conventional banking market is moderately concentrated; banking markets in Oman and Qatar are concentrated, the study said. The HHI is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. The study results revealed that the UAE conventional banks outperformed the GCC banks performance in all key business areas. That is, the compounded annual growth rate (CAGR) of 14 percent in real assets, 18 percent CAGR in real loans, and 17 percent CAGR in real deposits compared to GCC's CAGR of 9 percent, 8 percent and 5 percent respectively. The potential strengths in these key performance areas imply that the UAE banks have clear competitive edge amongst GCC banks to prudently expand from the deposits mobilized from the private sector in the UAE. In the UAE, only Abu Dhabi conventional Bank, National Bank of Abu Dhabi, and the National Bank of Dubai were among the efficient conventional banks. Interestingly, these banks managed to keep their efficiency level throughout the 2001- 2005 period, and were joined briefly by the Commercial Bank of Dubai in 2003. Comparatively, the conventional banks in the UAE enjoyed a higher average efficiency score than other GCC countries as a whole in 2001. However, country-wise, Kuwait is the most efficient country (with an average of just above 95 percent efficiency), significantly higher than that of the other countries, including the UAE. The average efficiency score of the banks in the UAE is quite competitive with the rest of the GCC banks, whether conventional or Islamic. The exceptions are Kuwait and Oman with the former, in some years; enjoy significantly higher efficiency in running their banks, and the latter host the least efficient banks in the GCC region. The competitiveness among the other GCC countries seems predictable as the possibility of the movement of capital from one country to the other makes the decision makers, including those of the banks, aware of the importance of their efficiency and hence profitability. In the UAE, the Islamic banks have taken away a significant share of real loans and real deposits business from conventional and foreign banks during the study period. This trend is likely to continue in the coming years since interest in Islamic financial products in general looks promising. This is reinforced by surveys (in Malaysia, Indonesia and Gulf states in Middle East) by McKinsey Consultants which suggest that, 25 percent of investors are strongly committed to seeking out and using financial services fully compatible with Shariah principles. Another 50 percent say they prefer to put their money into Islamic funds where possible, as long as they do not have poorer returns or service compared with conventional products. The growth of real assets and real loans of Islamic banks (IB) was larger than Conventional banks (CB) between 2001 and 2005. The growth of real deposits and real liabilities was much aggressive in IB compared with CB. However, the growth of real equity of IB was much lower than CB between 2001-2005. In 2001, Dubai Islamic bank was the most efficient bank among the three UAE Islamic banks. In 2002, Abu Dhabi Islamic bank (ADIB) also joined Dubai Islamic Bank as an efficient bank. ADIB was the only efficient UAE Islamic bank in 2003. In a turn of event, both these Islamic banks lost their efficiency in the following years as UAE had no representative in the league of efficient GCC Islamic banks. Islamic banks in Saudi Arabia have the highest numerical average efficiency in 2001, while the UAE Islamic banks come fourth in the ranking. Bahrain topped the list with 53 branches per 100,000 persons followed by Oman with (15 branches) and then UAE (12 branches). UAE is second to Bahrain regarding the number of banks. The study results revealed that there is evidence of market efficiency in the UAE and the GCC banking markets, whether conventional or Islamic. The Efficient Structure (EFS) paradigm is therefore valid in this market. This is signifying superior operating efficiency in UAE banking market. Given the study findings that there is no evidence of market power or collusive behavior across banks and the performance of these banks is driven by efficiency considerations, it is advised that central banks in UAE and GCC should advocate banks mergers on efficiency consideration to equip the banking sector to face the international competition in the region. One such example is the recent merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD), which brings the synergies of both banks' efficient operations. __
