Mediocrity as a strategic goal for UAE banks?

For some time, and as mentioned in previous articles of mine, I have wondered how there could be over 50 banks in the UAE, around half of which are full operating banks, given a population of circa 8 million, over half of whom are blue collar workers not in need of banking services. Basic economic theory would suggest that competition would lead to mergers or banks withdrawing from the market until the supply of banking services dropped to a level commensurate with the level of demand for banking services.

When a theory does not match the facts, a good place to start looking for insights into what is going on is to check each of the assumptions of the theory. The main assumption in questioning the large number of banks relative to the population is that free market capitalism would whittle down the number of banks through competition to a number more consistent with the size and demographics of the population.

My primary suspicion as to why the UAE has not had a great number of bank mergers or withdrawals from the market was that government business more than made up for the relatively small population. As I keep a close eye on how the banks are faring in the current economic contraction, which leads to a reduction in government business, I am reminded that in previous contractions, such as 2008-09 or 1998-99, there did not seem to be any pressure on banks to behave in a competitive manner, at least not wholly so.

To add to the confusion, whatever the reason for such a large number of banks to exist, it makes sense that when there is a contraction there should be competitive pressure on the banks.

There can be only one conclusion – the banks are not behaving competitively.

This logical conclusion is a bit of a shock and one can be excused for dismissing it out of hand. On the other hand, in the absence of a viable alternative theory I decided to explore this idea further.

If the banks are not behaving competitively then the only major alternative theory is that the banks are cooperating. I want to make absolutely clear that market players can behave legally and ethically in a cooperative manner without it taking the usually illegal or unethical form of collusion.

So what do I mean by the banks are cooperating? The more famous name for this model is game theory, a field of mathematics with important implications for economics, that was made famous by the movie A Beautiful Mind. In the movie Russell Crowe plays John Nash, a mathematician and a Nobel laureate in economics, and the portrayal of how Nash came up with the core idea for game theory is instructive.

In the movie Nash and three of his colleagues are in a bar when five women walk in, one of whom is stunningly beautiful. As Nash’s colleagues talk about the more beautiful woman, Nash envisions what would happen if each of them acted selfishly, a core idea in free market capitalism. In his vision, Nash and his colleagues all court the most beautiful woman in the group and end up destroying each other’s chances. Having failed with the “main prize,” the men then separate and each one tries to court one of the other women. Each of these women rejects any advances as they are unhappy at being chosen second.

Nash then envisions a superior approach in which he and each of his colleagues ignore the main prize and instead “settle” for one of her friends. In this scenario each of the men ends up on a date with one of the women, albeit not his preferred woman.

The main idea here is that if everyone settles for less than the best option, then everyone will end up with some reward at least. This is an astounding result, one that explained many inconsistencies in economic theory prevalent at that time.

Can game theory explain the over supply of banks in the UAE? The similarities to the scene from A Beautiful Mind described above are striking. The banks are equivalent to the men. The whole market represents the main prize. Now, if each of these banks invested in getting the whole prize, only one can succeed, in which case all the others go bankrupt or withdraw from the market. More likely, nobody succeeds but they waste a lot of money and resources to capture only a small share of the market.

Put another way, the reason that there is a large number of banks could be that they know any move to improve by one bank would lead to a competitive race that would harm all banks. In such a case the rational choice is to remain mediocre. That seems consistent with my customer experience.

This article was originally published in The National.


  1. Kevin Fernandes

    1. The premise that blue collar workers are not in need of banking services is flawed, perhaps there is a market that is not being explored and serviced here.
    2. Where does Customer Service, Mergers & Closures fit in with the Game Theory?..perhaps I am missing the point!
    3. The question is about the profitability of these banks given the limited market size, how does one validate the published “revenues & growth”?

  2. I agree Game Theory rightly explains banking industry of UAE. A very good read. Thank you writing. 👍

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