Union National Bank was established in 1982 in Abu Dhabi as a Public Joint Stock Company. Today, it is one of the largest banks operating in U.A.E and is ranked amongst the best banks across the globe for its quality banking services. It is headquartered in Abu Dhabi and offers variety or products to its corporate and individual customers.
Union National Bank has increased its service areas from traditional banking services to more complex, modern banking and financial service. Today, it not only helps a borrower in raising the accurate amount of capital to set up a new business or expand a current venture, but it also helps by providing consultancy services and helping in the registration process. The company has maintained a healthy double-digit growth rate for the past two years, despite the fact that markets across the globe are in the process of recovering from financial crisis.
Union National Bank operates in a region marked by financial prosperity through the sale of natural resource (oil). This is why it is not surprising that the banking industry in Middle East has been able to bear fewer losses as compared to those in the other regions. However, Union National Bank has thrived to reduce this dependence to the minimum; it has not only introduced other products in the market but has also managed to hedge the risk. Thus, good growth rate of the bank cannot be wholly attributed to the economic conditions and stability; rather it should be appreciated that in an atmosphere of complete stability and reliance on traditional methods, Union National Bank has chosen to function efficiently and to earn every unit of its revenue.
The primary task of the management team is to ensure the provision of top quality services to clients (Waldron, 2005). The bank prioritizes quality over volume, and this is evident from the achievements of the bank. It has managed to achieve prestigious awards and honors over the years for its top quality management. It has received recognition for at the international level.
Union National Bank offers a variety of services through its subsidiaries; Union Brokerage Company and Al Wifaq Finance Company.
While the global economy continues its struggle to recover from the financial crisis and the most recent Euro debt, Middle Eastern economies continue to benefit from oil related revenues. The only disturbing factor has been the social unrest that has led to the fall of regimes in the region. Despite of this unrest, United Arab Emirates has managed to secure significant inflow of capital from all over the world. The rate of return to these investments and the quality of services has played a major role in attracting this capital. Under present circumstances, it can be safely assumed that over the next few years, the Middle East will be one of the safe-havens for investors. It guarantees a secure rate of return in a time when most of the large corporations have raised credit standards and shifted investment policies.
In this section a brief overview of the company and the market dynamics were presented, the next section will deal with literature regarding managerial accounting practices in the region especially the process of costing and the general trend regarding cost efficiency in the region.
The Middle East is known for its extensive oil reserves that guarantee a constant revenue stream. For decades, these oil fields have acted as the driving force for economic development. Today, this role has become more important as abundance of oil reserves have hedged the Middle Eastern economies against financial crisis by guaranteeing the presence of a tangible asset. However, the role of financial institutions has also been supportive and they have made a significant contribution in ensuring financial stability in the region (Farouk, 2011). Researchers conducted by Ernst and Young (2003) have highlighted the implementation and importance of managerial accounting practices in the modern economy. Therefore, it can be seen that the importance of managerial accounting has risen over the last few years especially after the fall of large banks in the recent crisis. It has become all the more important for banks in other regions to improve managerial skills and devise policies to hedge the company against any possible loss.
A better understanding of the factors that influence Managerial accounting practices in needed as concluded by Chenhaal and Langfield-Smith (19980. They (1998) analyzed managerial accounting practices in 140 large firms in Australia and found that the traditional accounting practices were much more common, and recent developments in the area were not implemented. However, they also cited the possible reason for this difference. The historical and cultural difference in the countries has a great influence over the ease with which companies adopt and accept developments in Managerial Accounting Practices. Countries with similar cultural heritage and background are expected to have a greater probability of accepting developments in practices.
Sulaiman (2004) did a detailed research on the managerial practices in the Eastern countries and concluded that the eastern firms assumed that the returns from using traditional practices were far greater than the contemporary one. This perception calls for a greater in-depth study of the market as available literature is of exploratory and descriptive nature.
Another important factor that might affect the adoption of new developments is the fact that Eastern countries are at a different stage of development as compared to their European counterparts. This means that difference in economic and financial situation across countries might play an important role in determining the extent of Managerial Accounting Practices being employed.
Torrecilla (1996) concluded in a study that the Managerial Accounting practices differed due to the nature of industry, size or volume of the company and the sector. This means that volume of the sector plays an important role in determining the extent to which managerial accounting practices are brought in line with international developments. In general, it can be seen that there are certain factors that determine the acceptance and adoption of managerial accounting practices. The Middle East has always relied heavily on traditional practices. Much of this dependence stems from the core of the economic structure, which relies on the revenue stream generated from the sale of oil. This dependence has paid off in the past as countries have been able to develop infrastructure and maintain a lavish lifestyle, but the main disadvantage is the fact that this dependence might prevent them from becoming more efficient by exploring the potential of other revenue generating sources and hedge them for a time period when the resource will deplete completely.
Traditional managerial accounting practices have focused on improving the internal process of a company (Lebas, 1996). They have produced results and have been successful in ensuring a decent level of efficiency for the company. However, markets dynamics change rapidly in the current global market structure. It has become very difficult for companies to rely on the traditional practices and compete with their competitors. This is why there is a general shift of focus in the developed world. The Middle East has still not adopted recent developments in the managerial accounting practices. It has to be realized that new methods such as activity based costing and balance scorecard page are much more efficient and easy to carry out. The banking sector in Middle East has thrived on the economic conditions. It has evolved into one of the most stable sector of the economy. This is because of the fact that the volume of operations is huge, and the constant inflow of capital is guaranteed because of the constant revenue stream from the oil field. Also, the sector has made a great contribution to the economy by introducing innovative products to increase investor interest in the sector and at the same time cutting down on costs.
The recent flair to improve management performance has taken roots in the economy through the banking sector, and it is expected that this practice will flow in the system and spread to other sectors, as well.
Union National Bank has a considerable share in the market. It has done well in introducing new products and exploring different business fields. This has not only diversified portfolio of the company but has also reduced risks to investment. In an era, when the global economy is struggling to revive the banking sector, Union National Bank has grown at a significant rate. While most people would link this growth as an outcome of the economic conditions in the country, others with greater insight into the managerial policies would attribute this to the improved managerial practices and the willingness to cut down on the cost. Costing has thus been an important part of Managerial Accounting Practices in the bank.
A brief look at the last three years financial data is enough to prove this point. The company has not only managed to increase its sales volume, but at the same time it has managed to cut down on the costs, as well. The financial statistics depict a healthy financial status and future of the company.
Total assets of the company have increased over the last three years; this shows that the company had been investing in a period when most of the banks started pursuing a safe approach. Also, it depicts the confidence that the company has in its investment portfolio. This confidence is translated into increased amount of inflow of capital. The managers have done well to ensure the achievement of annual sales targets. The expansionary approach used during a relatively slow market has given the company a competitive advantage and a greater market share during the past few years.
Union Bank has traditionally been an innovator and an advocate of the new developments in Managerial Accounting Practices. This is why it has always managed to be at the top of the list of Quality Banks in the regions. The company builds on its reputation as the highest rated quality bank despite the fact that it is ranked 5th
on the basis of business volume.
While several Managerial accounting practices of this bank can be explored and studied in detail, costing has been chosen for this assignment. Costing is an important part of the managerial decision making process. It is important to meet the budgeted values through efficient costing techniques.
Union National bank has employed recent costing practices, the results of which are evident in the financial statements of the country for the fiscal year 2011. The cost-income ratio shows that the bank has successfully reduced the cost of every unit of income generated. In a global scenario, where companies are cutting down on production and profits, Union National bank has not only managed to increase sales volume, but has also increased its income at a reduced cost per unit. This shows that the management has employed the mix of activity based costing and balanced scorecard technique efficiently. Traditional Managerial Accounting practices would have failed to produce such results.
In contrast to the literature review, it can be seen that Union National Bank has not followed the trend in the society; rather it has decided to adopt the modern developments and improve efficiency.
Also, costing practice in Union National bank does not assume constant returns to investment, rather costing methods strives to minimize the cost every year so as to make sure that maximum benefits are reaped by the investor.
An important distinction in the income statement of the bank is the failure of the bank to improve its Islamic finance section. This will have to be improved as Islamic finance is becoming increasingly popular in modern finance.
In the banking sector, costing can be a tricky phenomenon as it is very difficult to predict the future market situation accurately especially after the recent financial collapse in the West. The income statement of Union National Bank for the year 2011 shows that the bank was able to increase its interest income and at the same time reduce its interest expense. The increase in operating income was also far greater than the increase in operating expense for the bank.
The financial data depicts an effective costing strategy employed by the bank. Not only were they able to benefit from market conditions and increase their interest income by charging a higher interest rate, but they were also able to increase the spread between the interest income and interest expense.
Also, here it should be noted that the bank has managed to expand at reduced cost per unit expansion. This shows that the indirect costs were minimized and budgeting estimated were achieved. The direct cost of introducing a new product is very difficult to reduce, while the indirect cost can be reduced through efficient management (Clarke, 1997).
A thorough look into the costing methods employed and demonstrated by Union National Bank depicts that the bank is not afraid of taking risks even in a global economic situation of recession. Furthermore, in contrast to other banks in the same region, Union national Bank places more emphasis on the management quality and overall efficiency of its operations. The material available did not give an insight into the exact ways in which the company adopts and employs the Managerial Accounting Practices, but the financial performance and vision of the company gives us a broad overview of these practices. It is sufficient to help us understand the environment at Union National Bank. In a nutshell, the bank stands out in the market for its determination to deliver the best result and not to depend on the economic condition entirely. Also, the vision of the bank to improve management by adopting new developments in Managerial accounting practices is an important distinction especially in the Middle East Region. The bank has also managed to have uniform practices in all regions in which it operates. It has lowered the short-term costs.
- The Bank must continue diversifying its portfolio, as it has proved fruitful in generating sales. However, it should also keep a check on the indirect costs of diversification (Goot, 1996).
- The Islamic Finance section of the bank needs greater managerial efficiency with respect to performance. Islamic Finance is becoming increasingly popular, and the company must, therefore ensure that it does not forgo a reasonable chunk of this market.
- The company must continue its pursuit for improvement in the management process. However, before adopting a certain Managerial Accounting practice it must run a check to ensure that the market scenario, culture and development stage required for such a development are present.
- Also, the company must put more focus on cutting down on the long-term costs. While the company has done significantly well in curbing down the short-term cost, long-term costs have not received equal attention.
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