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Journal of Applied Finance & Banking, vol. 3, no. 5, 2013, 55-66 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd, 2013 Management Practices of the Banking Industry in the Kingdom of Bahrain Aaron Paul M. Pineda1 Abstract This study aims to determine the management practices of the banking Industry in the Kingdom of Bahrain and their level of effectiveness. The researcher used the qualitative and quantitative type of research in the analysis of data. The survey questionnaire was the main research instrument used by the researcher in generating the primary data of the present study. The findings further revealed that there is a statistically significant relationship between the status and level of effectiveness along investment management, it accept the null hypothesis (there is relationship) and reject the alternative hypothesis. There are common problems encountered by the respondents on the management practices in the banking industry such as: lack of seminars and training of credit staff and other bank employees, inability to correct problems and implement appropriate risk management practices, inability to correct problems and implement appropriate risk management practices, and political influences when approving the loan. The least problem perceived was on management decision is not scrutinized by independent audit process. The problems viewed by the respondents in relation to the management practices will also be identified. Ultimately the researcher made implications on the impact of the banking industry in the Kingdom of Bahrain. This will be the basis for the conclusions of the study. JEL classification numbers: Keywords: Management Practices, Banking Industry, Implementation, Effectiveness, Kingdom of Bahrain. 1 PhD, Department of E-Commerce, AMA International University, Bahrain. Article Info: Received : June 18, 2013. Revised : July 12, 2013. Published online : September 1, 2013 56 Aaron Paul M. Pineda 1 Introduction Management requires codifying the concept of good and bad management into a measure applicable to different practices in manufacturing sector, educational institutions, and banking industry both local and global. Other researchers used an interview-based management practice evaluation tool to determine the management practices of the thousands of companies across the globe. These 18 practices for evaluation include the four broad areas such as: operations; performance monitoring; target setting; and Incentive setting (Bloom, et al., 2005). The present study, the researcher focused on the management practices of the banking industry along five broad areas in management, such as: investment management, operation management, risk management, strategy management, and local and global banking in selected financial institutions in the Kingdom of Bahrain. Moreover, it is essential that strategic planning and management must be given high importance in the banking industry. In other words, strategic planning can help an organization, its vision and priorities in response to a changing environment and to ensure that employees of the company are working toward the same goals. In short, strategic planning is a systematic process through which an organization agrees and builds commitment among key stakeholders to priorities that are vital to its mission and responsive to dynamic environment; and guides the acquisition and allocation of resources to achieve their priorities. In an article 1986, it was mentioned in the investment management asset allocation, a group of researchers raised the shackles of many an active portfolio manager by estimated 93.6 percent of the variation in quarterly performance at professionally managed portfolios could be explained by the mix of stocks, bonds and cash (New York University). This statistic is open to question, there can be no denying the importance of the asset allocation decision to overall portfolio returns (New York University). The researchers looked at the allocation across financial assets; they would define the asset allocation decision much more broadly to include real assets, real estate, and human capital. However, the asset allocation decision follows logically from the client assessment. It is understood the risk preferences, cash needs and tax status of the investor, the portfolio manager has to decide on the mix of assets that maximizes the after-tax returns subject. According to New York University (2012), the passive approach to asset allocation, where the investor’s characteristics determine the right mix for the portfolio. The International Monetary Fund (IMF) in the Kingdom of Bahrain acknowledged the Financial System Stability Assessment (FSSA) which is based primarily on the work undertaken by the Monetary and Financial systems and Middle East and Central Asia Departments and approved by Enoch and Chan (2006). It could be noted that the main findings of the Financial Sector Assessment Program (FSAP) revealed that: 1) the financial system is enjoying strong performance under favorable circumstances, and remains a major contributor to overall growth. The main risk stems from potential overheating in the economies of the region, but the system should be resilient to likely shocks; 2) Prudential regulations are modern and comprehensive, and supervision is generally effective, especially in the dominant banking sector (IMF, 2006). However, supervisory capacity needs to be expanded in line with new regulations and to keep up with the growth and increasing sophistication of financial institutions; and 3) According to IMF (2006), the further expansion of the Islamic sector, the development of housing finance, and the deepening of securities markets are important for the future growth of the financial system (IMF, 2006). However, the banking and insurance sectors will eventually undergo Management Practices of the Banking Industry in the Kingdom of Bahrain 57 consolidation. According to Daniel Hardy, the author of IMF Country Report, the FSAPs are designed to assess the stability of the financial system as a whole it was developed to help countries identify and remedy weaknesses in their financial sector structure (IMF, 2006). However, FSAPs excluded the risks that are specific to individual institutions like asset quality, operational or legal risks, or fraud (International Monetary Fund, 2006). 2 Preliminary Notes 2.1 Bank This refers to a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. In this study, it refers to providing services to customers of keeping their money with nominal interest. 2.2 Economic Development This refers to beliefs of Bahrain people that improving human conditions such as the reduction or elimination of poverty, illiteracy, and exploitation that the banking industry can be their alternative to generate income and share it to their constituents. 2.3 Local and Global Banking This refers to useful banking money transfer on occasional travel of Bahrain national if there is business engagement outside the country. 2.4 Investment Management In this study, it refers to the buying and selling of investments of the people in Bahrain. In other words, it can also include banking and budgeting duties, as well as taxes. But the term most often refers to portfolio management and the trading of securities to achieve a specific investment objective respectively. 2.5 Operation Management This refers to a multi-disciplinary field that focuses on managing the overall activities of an organization's operations. In this study, it refers to operations of the Bahrain businesses where their management focuses on carefully managing the processes to produce and distribute products and services. The overall activities are mainly concerned on the product creation, development, production and distribution. 2.6 Risk Management This refers to the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making in the organization which quantify the potential for losses in an investment and takes an appropriate action with risk tolerance. 58 Aaron Paul M. Pineda 3 Main Results - The Status and the Level of Effectiveness of Management Practices of the Banking Industry in the Kingdom of Bahrain 3.1 Investment Management Practices (IMP) The status of the management practices was ―Very Good‖ that they provide review and analysis of company fund of funds structures, offshore funds, mutual funds, and other arrangements.” This means this is a usual practice of the banks in Bahrain to review and analyze financial transactions specifically on the company funds. On the other hand, the level of effectiveness of the banking industry along investment management was ―Very Good‖ which “they offer clients a complete package of legal management services by coordinating other investors and associates in banking industry. This implies that the banks offer clients a complete package of legal management services for the sake of compliance considering the rules and regulations in which the services offered to clients in order to attain maximum client satisfactions respectively. The practices of banking industry in Bahrain, it offer clients a complete portfolio of the investment management industry along mutual funds, domestic and offshore private investment funds, exchange-traded funds was ―Very Good‖ on the status while, on the effectiveness was ―Very Good‖. On the status, the least weighted mean was ―Very Good‖ on ―they help the design and creation of the investment management products and services and more specifically the collective trust funds of the firm‖ and ―Very Good‖ on the level of effectiveness in this aspect. Summarily, the final mean rating was ―Very Good‖ while, on the level of effectiveness of the management practices of the banking industry along investment management practices was also ―Very Good‖. 3.2 Operation Management Practices (OMP) The highest weighted mean on the status of management practices of the banking industry in the Kingdom of Bahrain was ―Very Good‖; This means that the accounting and finance department prepares the bank reconciliation every three months considering the balance per bank statement/balance per books by month with the necessary adjustments to determine the adjusted/corrected balance per bank and adjusted/corrected balance per books which is probably the adjustment to the cash balance on the company’s books. The researcher interviewed the respondents during the retrieval of the questionnaire, they say, that reconciliations are generally performed by means of accounting software like adjustment to the cash balance on the company’s book and adjustment to the balance per bank to bank statement. The status of, ―the bank of Bahrain controls of banks’ foreign exchange exposures, liquidity and position risk and more specifically the wholesale market in the country‖ was ―Very Good‖. Similarly, on the level of effectiveness of the management a practice was Very Good‖. This implies that all banks in Bahrain are controlled by the government in terms of foreign exchange, liquidity and financial risk management. However, the least weighted mean was ―Good‖ on item one (1), ―They build and maintain good relationships both internal and external organizations in the Kingdom of Bahrain.‖ Likewise, on the level of effectiveness the least mean rating was also (1) which is ―Good‖; and ―there is an annual physical inventory of assets of the bank and other essential documents held in the bank’s vault of day to day operations‖. Summarily, the final mean Management Practices of the Banking Industry in the Kingdom of Bahrain 59 rating on the status was ―Good‖ while, on the level of effectiveness of the management practices of the banking industry along investment management practices was ―Very Good‖. 3.3 Risk Management Practices (RMP) The status of management practices of the banking industry in the Kingdom of Bahrain has demonstrated the ability to promptly and successfully address existing and possible problems and risks‖. On the other hand, the level of effectiveness of the banking industry along risk management had a mean rating of ―Very Good‖. This also followed by mean rating of ―Very Good‖ on ―the bank has appropriate internal policies and controls addressing the operations and risks of important activities‖; and ―the risk management practices shows that there is an evidence of accuracy, timeliness, and effectiveness of management information and risk monitoring systems appropriate for the size, complexity, and risk profile of the company‖. However, the least weighted mean on the status of management practices along risk management was ―Good‖ on ―the bank promotes effective operations and reliable financial and regulatory reporting; safeguard assets; and ensure compliance with laws, regulations, and internal policies‖ however, the least weighted mean on the level of effectiveness along risk management was also ―Good‖. Summarily, the final mean rating on the status was ―Good‖ while, on the level of effectiveness of the management practices of the banking industry along investment management practices ―Very Good‖. 3.4 Strategy Management Practices (SMP) The status of management practices of the banking industry in the Kingdom of Bahrain was ―Very Good‖ on ―the bank performed the annual report, review the assets, and where the bank revenue is derived‖. On the other hand, the level of effectiveness along strategy management is ―Very Good‖. This implies that the financial records of the bank is periodically reviewed the assets specifically, the income statement, balance sheet, and cash flow. The balance per bank statement/balance per books to determine the adjusted/corrected balance per bank and adjusted/corrected balance per books which is probably the adjustment to the cash balance on (per) the company’s books. Moreover, the strategy management in the bank is clear in terms of the resource requirements, and the bank’s activities could be achieved with modest resources had a of ―Very Good‖ on the status of management practices along strategy management. On the level of effectiveness along strategy management, had a ―Very Good‖ rating. This implies that the resources are essential to the company to reach the target goals of the banks. It is also similar, that the strategy should be clear particularly on the resource requirements. It is not likely that the proposed work programme in any organizations could be achieved with modest resources as mentioned. With this, the bank document should indicate alternative sources of financing respectively (African Development Bank, 2012). On the aspect of status of management practices along strategy management, the least mean rating was ―Good’ on the bank provides intellectual leadership through seminars, trainings, and conferences relative to banking systems and other development challenges. 60 Aaron Paul M. Pineda 3.5 Local and Global Banking Management Practices (LGBMP) The highest weighted mean on the status of management practices of the banking industry in the Kingdom of Bahrain was ―Very Good‖; on the level of effectiveness of the banking industry along global and local banking management was ―Very Good‖ on ―the banks adopted the current International Financial Reporting Standards (IFRS) for the purpose of implementing industry best practices came after the event‖. On the other hand, the status of management practices of banking industry also ―maintain the integrity of local and global banking operating account and virtual centralized liquidity management with rating of ―Very Good. On the status of management practices of the banking industry, which states that, ―the banks combine local and global management practices and expertise to provide flexible and strong liquidity management solutions. The overall mean rating on the status was ―Very Good‖ while, on the level of effectiveness of the management practices of the banking industry along local and global banking management practices had a rating of ―Very Good‖. Summarily, the findings further revealed that status and the level of effectiveness of the management practices of the banking industry in the Kingdom of Bahrain. The top most management practices in terms of status are arranged accordingly. These are: 1) Investment Management Practices; 2) Strategy Management Practices; 3) Risk Management Practices; 4) Local and global banking management practices; and 5) Operation Management Practices. 3.6 Significant Relationship The findings revealed that the absolute value of the correlation coefficient (r) is greater than the critical values for Pearson’s r = .878 or ―Significant‖. This means reject the null hypothesis(there is no relationship) and accept the alternative hypothesis. The findings further revealed that there is a statistically significant relationship between the status and level of effectiveness along investment management, r (3) = .912, p< .05; operation management, r (3) = .960, p< .05; strategy management r (3) = .918, p< .05; and local and global banking r (3) = .918, p< .05. On the other hand, on risk management, r (3) = .843, p> .05. The absolute value of the correlation coefficient (r) is less than the critical values for Pearson’s r = .878 or ―Not Significant‖. This means accept the null hypothesis (there is relationship) and reject the alternative hypothesis. The p<.05 means that the correlation coefficient exceeded the critical value found on the table for Pearson’s r, and 95% confident that a relationship exists. On the other hand, p> .05 means that the correlation coefficient is less than the critical value on the table and cannot be 95% confident that a relationship exists. Summarily, it can be concluded that: There is a statistically significant relationship between the status and level of effectiveness along investment management, r (3) = .912, p< .05; operation management, r (3) = .960, p< .05; strategy management r (3) = .918, p< .05; and local and global banking r (3) = .918, p< .05; except the that there is no statistically significant relationship between the status and level of effectiveness along on risk management, r (3) = .843, p> .05, it accept the null hypothesis (there is relationship) and reject the alternative hypothesis. Management Practices of the Banking Industry in the Kingdom of Bahrain 61 3.7 Problems Encountered Further it was revealed that ―lack of seminars and training of credit staff and other bank employees was the highest frequency of 33 or Rank 1. This means that the bank employees in Bahrain need seminars and trainings either local or international level to make them aware of the new technology and other issues and concerned related to their duties and functions. On the other hand, Inability to correct problems and implement appropriate risk management practices had a frequency of 29 or Rank 2 on ―inability to correct problems and implement appropriate risk management practices‖; and ―Political influences when approving the loan‖ with a frequency of 28 or Rank 3. The least problem was on the ―management decision is not scrutinized by independent audit process with a frequency of 13 or Rank 6. This means the management decision must be strengthened and implement the internal or external auditing policy of the banks. 4 Labels of Figures and Tables Table 1: Status and the level of effectiveness of the management practices of the banking industry along investment management practices 62 Aaron Paul M. Pineda Table 2: Status and the level of effectiveness of the management practices of the banking industry along operation management practices Table 3: Status and the level of effectiveness of the management practices of the banking industry along risk management practices Management Practices of the Banking Industry in the Kingdom of Bahrain 63 Table 4: Status and the level of effectiveness of the management practices of the banking industry along strategy management practices Table 5: Status and the level of effectiveness of the management practices of the banking industry along local and global banking management practices 64 Aaron Paul M. Pineda Table 6: Summary of the status and the level of effectiveness of the management practices of the banking industry in the Kingdom of Bahrain Table 7: Significant relationship between the status and the level of effectiveness of the implementation of the management practices of the banking industry in the Kingdom of Bahrain Table 8: Problems encountered by the respondents in the implementation of the management practices in the banking industry in the Kingdom of Bahrain