Expected Effects of Entrenching Financial Cooperation between Korea and the Middle-East and International Expansion Strategies of Korean Banks to the Middle-East Financial Markets

Oh Suk Yang

Throughout the Chapters 2, 3, 4, 5 in respective order, this paper examines the concentration ratio of bank market in GCC at status quo, competitiveness of Islamic bank in GCC, and competitive advantage and internationalization strategy of banks comprising GCC market, local commercial banks, and global commercial banks in GCC market.
In chapter 2, we examined the distribution of Islamic banks at status quo, the peer group analysis on 11 peer groups of the world’s largest (total asset) Islamic banks, and regional distribution of Islamic banks, along with careful observation on development and prospect of GCC bank market. The competition in bank market of GCC and MENA countries was analyzed through peer group analysis and PR H-statistics, together with thorough analysis on the consumption behavior for GCC bank at both individual and corporate level.
GCC region is the most concentrated area of Islamic banks and assets, where "troika" of Islamic bank industry is established among Bahrain, Malaysia, and Iran. Meanwhile, GCC occupies a great share, outweighing other regions among the Top 20 Islamic banks. The average of net interest margin (3.01%) of GCC Top 20 Islamic banks surpasses the average of the Islamic banks all over the world (2.35%).
The size of GCC bank market measured by total asset to bank equity ratio has grown by 17.4% during 2000~2011; domestic private credit (to GDP %) has grown by 63.7% during 1993~2011, which proves its outstanding financial development in light of bank market activity. In terms of asset size, UAE and Saudi Arabia are predominant, while Bahrain shows a steady rising tendency of GDP ratio. Furthermore, GCC bank industry, in general, presents rapid trend of recovery and development. The fall of bad debts and increase of bank profitability are expected to be consistent, and the saving ratio over 170% makes the prospect even brighter.
The peer group analysis substantiates the competitive status of GCC bank market. This is evident in the Gini’s coefficient measured by Lorenz curve: net income (0.24), total asset (0.38), operating revenue/turnover rate (0.01), market capitalization (0.38) and so on. However, for the purpose of methodological rigor, this paper applies PR-model to demonstrate the level of competitiveness in GCC bank market. As a result, it has been proven that GCC Islamic bank market is at balanced-competitive status (H-statistics 0.6386), which is a fairly equivalent level in comparison to bank’s H-statistics (0.60~0.80) over 50 different countries according to preceding research (Claessens and Laeven 2003). Meanwhile, GCC commercial bank market is also proven to be at balanced-competition level (H-statistics 0.6652).
In chapter 3, for escalation of practicality and holistic evaluation, an empirical analysis was conducted using pertinent firm specific variables, derived from internal factor such as financial structure and managerial attribute, and macro economic variables to analyze external factors affecting profitability of banks. As a result, the deviation in the determinants for each indicator between Islamic bank and commercial bank is verified: profitability, growth, efficiency, financial strength and stability.
In chapter 4, an empirical analysis was conducted to examine the correlation between corporate governance and firm values of Islamic bank and commercial bank.
The biggest distinction in corporate governance between Islamic bank and commercial bank is the presence of board of Sharia and Sharia executive department. Through ex ante and ex post supervision of bank business, Sharia board reinforces the compliance of Islamic law in their business. However, there are arguments purporting that multilateral supervision rather hinders efficiency, which abates the authority of Sharia board’s regulation. Furthermore, the original function of Sharia board may stand out in financial trade, but at work of bank management, the practical managerial skills of Sharia executive management is appraised to be more significant. The operation of Sharia board differs from country to country, mainly in two ways: The presence of internal Sharia board and the employment of external consultants.
In chapter 5, GCC bank market was investigated as to inquire the suitability for overseas expansion site of Korean banks. The examination encompassed the study of entrance and concentration of global bank’s GCC bank market, and the internationalization of participants in GCC bank market and Korean domestic banks. Competitive advantage of GCC bank market participants including Korean banks was also analyzed.
Concentration ratio of GCC commercial bank, executed with peer group analysis, delineated fairly low value. In measuring market concentration ratio using Lorenz curve, the Gini’s coefficient substantiated the GCC commercial bank at balanced-competition: net interest revenue (0.16), operating income (0.16), net income (0.32), savings & short-term fund (0.17) and so-on.
It can be proposed that a bank has sustainable competitive advantage when the bank’s resource for its competitive advantage is valuable(V), rare(R), immitable(I) for its competitors, and have organization(O) that can exploit such resource. Through VRIO internal analysis, domestic bank’s competitive advantage is based on its IT and consumer-on-demand service. Information, which is the pivotal source of competitive advantage for financial industry, is essential to realize economy of scale, and is expected to function as a resource that can overcome the ownership-specific advantage and location-specific advantages of Islamic bank and local commercial banks.
Meanwhile, result from quantitative analysis on performance suggests that Islamic bank has the highest competitive advantage on growth and financial strength, and competitive disadvantage on profitability, efficiency and stability. Global banks have displayed the highest competitive advantage on growth, but stopped at showing only fairly high competitive advantage on the rest of the indicators. Local commercial banks have shown the highest competitive advantage on profitability and growth, but fairly high competitive advantage on efficiency, stability and financial strength. Meanwhile, the Korean domestic banks appeared to have competitive disadvantage on growth, but they also appeared to be equipped with the highest competitive advantage on stability and financial strength, and fairly high competitive advantage on profitability and efficiency.
This study ultimately proposes Korean bank’s strategies for GCC bank market entrance. There are various strategic options for Korean domestic banks to penetrate into foreign bank market. First, collaborative entrance with another Korean bank already existing in the market would be the most favorable strategy. Second, collaboration with a local bank could be a safe choice in eluding the potential risks associated with foreign market entrance. The third option would be augmenting the risk-avoiding opportunities by joint overseas expansion with a manufacturing firm.
However, the following factors are required for Korean domestic banks to sustain its growth after its entry to GCC bank market. The first factor is the ability to incorporate various needs of local people in their financial products. Secondly, a pursuance of long-term orientation is a prerequisite for the acquisition of sustainable development, offsetting potential costs from internationalization at the same time.
Another strategy that drives GCC bank market entrance of Korean domestic banks to success is the optimization of internalization, which serves as a catalyst in reducing potential risks through experiential learning. At similar marginal cost-marginal benefit level, it is favorable for banks to reduce risks by maximizing the process of internalization.
However, entering GCC bank market is unachievable with sole effort of Korean domestic banks. Thus, in addition to persistent efforts of the Korean government through different policies, the following complementations are required to be processed. First, more active and practical moves regarding contracting agreements and treaties at government level are to be encouraged. Secondly, the government support to the bank's entry to GCC by training mid-east Islam experts are to be expanded and intensified. Third, a policy promoting GCC market penetration of domestic banks and firms is also a pressing matter.
Lastly, unlike the aforementioned optimistic expected effect from global business activities, foreign market entrance may become easier due to deregulation, which could result in excessive penetration on specific regions, arousing concerns about deterioration of profitability and financial accidents. In order to prevent such accidents, the supervisory authorities should strive to reinforce their superintendence on foreign branch, control over imprudent foreign market entry, stay vigilant on law compliance, and ameliorate internal control systems.