Abu Dhabi Islamic Bank.
Abu Dhabi Islamic Bank has been selected for analysis in this study.
Demand, Supply, and Elasticity
Principal Products and General Traits of Abu Dhabi Islamic Bank
The Abu Dhabi Islamic Bank (ADIB) operates within the field of national commercial banks. The bank's main office is located in the United Arab Emirates. The bank is a publicly traded institution that specializes in providing Sharia-compliant Islamic financial, investing, and banking products and services. Abu Dhabi Islamic Bank has a total of 69 branch networks throughout the country (United Arab Emirates) (AMEinfo: Abu Dhabi Islamic Bank posts record quarterly profit of Dhs319.1m, 2012, para. 5).
In this study, we shall assess the major branch of Al Bateen. The branch operates under five primary business segments: the wholesale banking segment, which provides credit facilities and financial services current accounts and deposit accounts to both institutional and corporate clients; the retail segment, which provides commercial and consumer Ijara, Murabaha, funds transfer facilities, and Islamic covered cards; and the corporate segment, which provides credit facilities and financial services current accounts and deposit accounts to both institutional and corporate clients (AMEinfo: Abu Dhabi Islamic Bank posts record quarterly profit of Dhs319.1m, 2012, para. 5).
In addition, trading facilities are offered within this area. The third section is the private banking segment, which provides lending and financing facilities as well as current accounts and deposit-taking services for wealthy individuals. The fourth area is real estate, which focuses mostly on acquisition, development, selling, and leasing (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 2).
The final group is the capital markets segment, which provides treasury and trading services, as well as money market brokerage services. The company's overall revenues for the 2010 fiscal year amounted to AED 3,074 million, indicating a 22 percent rise over the 2009 number. During the same period, a net profit of $1,024,000,000 was reported (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 2).
Islamic credit cards and automobile financing product
Abu Dhabi Islamic Bank's two most important products are its Islamic covered credit cards and its car financing program (AMEinfo: Abu Dhabi Islamic Bank posts record quarterly profit of Dhs319.1m, 2012, para. 4).
Islamic greeting cards
The bank offers cover cards to individuals seeking protection against financial emergencies. This solution provides the user with unparalleled access to quick cash in times of emergency. The bank was the first to distribute Islamic cover cards (AMEinfo: Abu Dhabi Islamic Bank posts record quarterly profit of Dhs319.1m, 2012, para. 5). There are two types of credit cards: a Gold card with good coverage and competitive profit margins and a Platinum card with high spending limits, lifestyle advantages, and high profit margins.
The sales of Islamic greeting cards climbed by 61 percent, from AED 98686 in 2009 to AED 158448 in 2010, from a total of 98686 in 2009. (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 6). Consequently, the sales rate jumped by 60% over the two time periods. The average difference in selling rates between these financial institutions is less than AED 3 and sits at 17.5 percent for auto loans and 20.1 percent for credit cards. This equates to a selling price of $1,58,448.08 for cover cards and AED 340,000 for a Murabaha auto loan.
Auto finance (Vehicle Murabaha)
Over the course of the past two years, the product's sales have declined. In 2009, vehicle Murabaha sales totaled 8,022,334,000 AED, however in 2010, the product recorded total sales of 7,904,499,000 AED, a decrease of 1.5 percent (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 9).
Evaluation of the company's supply and demand
Automobile Finance (Vehicle Murabaha) Initial Supply and Demand graph Figure 1 depicts a demand and supply graph.
At E1, the initial equilibrium falls. At this phase, it is believed that the initial demand and supply curves are in a perfect connection, before market forces alter their shape (Dar & Presley, 2000). At point E1, the amount demanded and quantity provided are precisely in sync with the commodity's current market price. As stated previously, an increase in auto loan interest rates has a negative impact on demand.
Due to the high interest payable on bank loans, loan repayment will incur additional expenses. As a result, clients will refrain from obtaining auto loans. Consequently, the demand for vehicle loans will decline, which will have a negative effect on the demand-supply relationship. However, assuming everything else is equal, a positive relationship will exist between the demand and supply of auto loans on the market, as the demand for auto loans will increase when the interest rate charged per loan falls. Consequently, a potential customer will benefit from the ability to retain more cash during loan payback (Dar & Presley, 2000, p. 6).
Aspects influencing the form and behavior of the Demand and Supply Curves
When a consumer's income improves, so does their total disposable income. The consumers can afford their loan interest payments. Therefore, they want additional credit products from the bank. This causes the demand curve for loans to shift outward from D0 to D1, and a new equilibrium is reached at point E1 with price P1 and a greater quantity Q1.
Conversely, when income decreases, individuals' disposable income decreases (Dar & Presley, 2000). Since automobiles are luxury goods, the demand for automobile financing declines, the quantity of automobile financing requested from the bank decreases from the initial quantity, and the price decreases from P0 to P2. At point E2, a new equilibrium is attained.
Costs of competing goods and services
The car loan market in the UAE is highly competitive and diverse in terms of available products. As a result of the intense competition, ADIB is confronted with a situation in which consumers tend to select the finest market deals. Currently, the bank offers auto loans for new cars up to a maximum of AED 350,000, or around 80 percent of the new car's worth. The loan must be paid back within four years (48 months).
Processing fees are one percent of the loan amount (ADIB Annual Report: Bank overview, mission, vision, and values). ADIB, 2010, para. 4). The bank faces substitutes such as the Noor Islamic Bank's Auto finance, which also raises competition for the bank's offerings. If the interest rates on auto financing at Noor bank are lowered, the demand for car loans given by ADIB will decrease, resulting in an inward shift in the demand for car loan products. Alternatively, if the price (interest rate) of the substitute product (Auto financing) is increased, the demand for the original product will decrease (Dar & Presley, 2000).
Customers will be more interested in Abu Dhabi Islamic Bank's auto loans. This would result in a shift in the demand for automobile loan products offered by ADIB, with the amount demanded increasing from Q0 to Q1 and a new equilibrium being reached at point E1.
Quantity of consumers
Employees of Multinational Companies, Employees From Reputable Local Organizations, Private Universities, Airlines, Colleges, Schools, UN Bodies, International Aid Agencies, Government employees and Business Persons, Self-employed Professionals such as Engineers, Doctors, Certified Accountants, Consultants, and Architects are the target consumers for the ADIB's Car Finance product (ADIB Annual Report: Bank overview, mission, vision and values ADIB, 2010, para. 5).
The loans are intended exclusively for the purchase of new and refurbished non-registered vehicles. The loan amount represents around 80% of the car's entire worth. The target populations consist of those aged 30 to 55. More persons entering this age group as a result of demographic shifts will raise demand for auto financing. The increasing demand will shift the demand curve to the right from D0 to D1, forcing the bank to raise the quantity of auto loans provided to Q1 at a higher price P1.
At the point E1, a new equilibrium is achieved with a higher price and a greater quantity of auto loans. If, however, fewer people fall between these age ranges as a result of demographic changes, we anticipate a reduction in demand for ADIB auto finance (ADIB Annual Report: Bank overview, mission, vision, and values). ADIB, 2010, para. 9). This is shown by the demand curve shifting to the left from D0 to D2. The bank is compelled to reduce the quantity of auto loans offered from Q0 to Q2 at a reduced price P2. At the location E2, a new equilibrium is reached.
Technology is increasingly included into the delivery of banking services. The availability of ‘loanable funds’ will expand as a result of a technological advancement that increases bank deposits (Dar and Presley 2000). As a result, more money will be available for lending under the car financing. The availability of auto loan financing will shift to the right from S1 to S2.
Number of auto loans. the number of rivals
Numerous rivals in the UAE banking business compete with ADIB for the same consumers. In addition, the banks offer nearly identical products, with only the brand names differing. These financial institutions include, among others, First Gulf Bank, Emirates Islamic Bank, National Bank of Dubai, Commercial Bank International, Citibank, Emirates Bank International, and Lloyds TSB bank. Given that the industry already has a significant number of competitors, it can be claimed that the industry operates under perfect competition.
Therefore, the entry or withdrawal of a single company will not affect the ADIB's car credit supply (Dar and Presley 2000). However, if numerous competitors enter the market, they are likely to steal ADIB's consumers by offering low costs and interest rates (ADIB Annual Report: Bank overview, mission, vision, and values ADIB, 2010, para. 6). This will result in a decrease in demand for ADIB loans as the demand swings to the left.
Similarly, the departure of a single company will have no effect on ADIB bank lending. Nonetheless, many enterprises leave the field; ADIB will earn a considerable market share due to diminished competition (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 5-6). This will be reflected in an increase in lending, as the supply curve shifts to the right from S1 to S2.
Number of auto loans. Costs of manufacture
Employee wages, processing fees, and bad debt and debt collection expenses account for the majority of the costs associated with processing auto finance loans (Dar and Presley 2000). Costs are crucial in determining an organization's profitability. When the cost of production rises, the finished product's price will also rise. The supply curve will move to the left as the cost of manufacturing rises; the quantity supplied will decrease as the cost of inputs for production rises. In a monopolistic market, where the manufacturer has entire control over the product's final price, this may not be the case. In this instance, the connection between manufacturing costs and supply is inversely proportional. Consequently, the quantity will decline from Q0 to Q1 as the supply curve shifts from so to S1. This is depicted in the following figure.
Number of auto loans. Other non-price variables (if applicable)
Other non-price factors have an equal impact on the demand for auto financing. Among these is religion. As a religion, Islam prohibits the imposition of fixed interest rates on loans (riba), and banks are prohibited from charging interest on their loans. For this reason, charging interest on loan products such as auto financing in a Muslim nation reduces product demand (Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance, 2012, para. 8). Variations in customer preferences and tastes, demographic shifts, and the costs of alternatives and complements are other non-price determinants (Dar and Presley 2000).
Demand Price Elasticity Evaluation for One of the Products
The price elasticity of demand (PED) as a percentage of income for (product/service).
Price elasticity is the degree to which the amount requested of a product responds to variations in price. The price elasticity of loan product demand has important consequences for the bank's overall success. If a company has market power, its pricing strategy is determined by the price elasticity of its consumers. Typically, borrowers are compelled to return their loans by a number of factors.
Dar and Presley (2000) state, “It can be claimed that products that account for a significant percentage of disposable income are typically elastic. This is related to the fact that consumers are more sensitive to modest changes in the prices of expensive goods than of inexpensive goods (p. 8). These include the prospect of receiving larger loans in the future if their credit history is exemplary. This impacts the price elasticity of demand for the bank's loan products, as more incentives to repay loans incentivize customers to do so.
Diagram representing price elasticity of demand as a proportion of income
As a result of their sensitivity to price fluctuations, loan products are characterized as price elastic. A modest price shift (P0-P1) results in a larger change in demand (Q0-Q1).
Number of Replacements
When there are more alternatives to a product, the likelihood of switching to them increases. In particular, the change may be compelled by an increase in the price of the product if the alternative stays comparably less expensive or of higher quality. When the price of a product rises, the availability of a substitute may cause a decline in demand. When prices rise, a household may opt for the best choice, particularly if doing so will positively impact savings or boost disposable income (Dar and Presley 2000).
Therefore, the numerous viable replacements in this instance will result in a very elastic demand curve, since the price sensitivity of the product attracts immediate changes in customer behavior, such as purchase patterns. A slight change in price (P0-P1) results in a larger change in quantity required (Q0-Q1), as customers opt for substitutes with a lower price tag or that are more economical in the long term.
Rank of necessity
The degree of necessity for a household product depends on its type. Despite a price increase, the demand curve for things that are fundamental and essential to a household's everyday life will not be significantly affected. As the product is essential, the household has no choice but to continue consuming or utilizing it. In this circumstance, however, automobiles are regarded a luxury and are not easily attainable by households. Therefore, a price increase for such a product will reduce demand (Dar and Presley 2000). A slight price shift (P0-P1) results in a larger change in quantity desired (Q0-Q1) because buyers will choose to wait and purchase when prices are lower, since the product is a luxury and not a need.
Price of the item as a percentage of income
The demand curve for necessities and luxuries is influenced by disposable income levels. “Goods that comprise a significant amount of disposable income are typically elastic. This is related to the fact that consumers are more sensitive to modest changes in the prices of expensive goods than of inexpensive goods ( Dar and Presley, 2000, p.9). The demand curve for automobiles can be characterized as elastic due to the product's numerous substitutes, which cause customers to react almost promptly to any change in price.
In addition, it is not a requirement, therefore customers can do without it or get it through less expensive means other than bank loans. The demand curve for this product is more elastic given that it demands a substantial portion of disposable income and accounts for a larger proportion of overall expenditures.
A small price change (P0-P1) results in a larger change in quantity demanded (Q0-Q1), as customers will choose not to purchase the product because it will consume more of their disposable income. This is due to the fact that automobiles require a greater commitment of the disposable income and account for a greater portion of the total expenditure in comparison to other competing needs.
ADIB: Business cards with coverage (2012). Web.
ADIB Annual Report: Overview of the Bank, Mission, Vision, and Values (2010). Web.
Abu Dhabi Islamic Bank posts a record quarterly profit of Dhs319.1m, according to AMEinfo (2012). Web.
Dar, H., and J. Presley (2000). Management and control imbalances in Islamic banking due to the absence of profit-loss sharing. International Journal of Islamic Financial Services, 2 (2), 1-10.
Money Camel: Abu Dhabi Islamic bank -new car loans-AIDB car finance. (2012). Web.