IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 10, Issue 3 (May. - Jun. 2013), PP 69-79 www.iosrjournals.org A Construct Validity of Investment Decision in the Banking Sector in Libya (A Structural Equation Modeling Approach) 1 2 Reda Aburas , Dr. Noor Raihan Ab Hamid 1(Faculty of Business Administration / University Tun Abdul Razak, Malaysia) 2(The Dean at the Faculty of Business Administration / UNITAR International University, Malaysia) Abstract: Investment decision is an important part of strategic decision making. This is because such decision has involves the allocation of money as is known currently over a period of time, in order to make a profit in future and also be subject to different degrees of risk and uncertainty. However, this paper has an objective to validate the measurements of investment decision in the banking sector in Libya. Moreover, this paper provides comprehensive information on the investment decision in Libyan commercial banks, as well as gaining an understanding on the dimensions of customers’ decisions to invest. Structural equation modeling using 2nd order CFA was employed to validate the measurements. The findings confirmed financial ability, perceived usefulness, product and company attributes and knowledge and past experiences as dimensions of investment decision. The present study has a fundamental contribution as a role model for the investment decision measurements in Libya. Keywords - Investment Decision, Libyan commercial banks, Construct Validity, Structural Equation Modeling I. INTRODUCTION The financial industry is witnessing fierce competition from major countries around the world that dominate the world’s economy. As such, these countries seek to support these financial institutions so as to be able to have the necessary factors for success, and one of the most important success factors is the acquisition of modern information system. Currently, these financial institutions are in competition with each other and therefore may be in a highly competitive state if there is access to high quality information system [1]. Potential customers will only direct the savings or investments towards capital markets, only if these markets provide credibility and durability that will ensure the highest degree of assurance for such savings to be in good and trusted hands. This in turn will create a granted interest that will achieve returns on these investments. Moreover, the capital markets offer channels and protect revenues for individuals as it is considered the key instrument in promoting economic development worldwide. This can bring about a number of economic benefits, including the benefits of acquisition, possession, use and returns on investments. Capital markets also represent companies that list shares in the stock markets so as to follow the rapid changes in the trading process [2]. This study is important in providing information on the subject of customer’s investment decisions. The director general of Computer Systems in the Arab Investment Bank, declared that with the expansion in use of modern technology and the latest tools developed in the banking sector, any branch of a bank that provides traditional banking services is now becoming less important, and will be more likely to lag behind the rest of the competitors. Hussam [3] stated that there are two dimensions of service quality necessary for improvements in the management of North African banks in general. The first one lies in the improvement and acceleration of services, including access to information for beneficiaries and customers which should be made easily available. The second dimension is the reduction of loads on the banks’ management, by developing and providing information services that do not require a concerted, sophisticated effort to be made by the staff of the bank. This dimension is neglected by many despite its great importance. This study also be useful to devise programs, treatment plans, and guidance, in order to achieve a higher quality where the investment decision measurements is concerned and also improve the performance of the banking sector in Libya. Moreover, the results of this study will have a positive effect on both the commercial banks and the stock market in Libya. This study will give a better understanding to the supervisors and CEOs of the commercial banks, on the importance of information service quality in providing better services that boost investment decisions, and thus assist the supervisors and CEOs of the commercial banks in developing a strategic plan associated with the information system and the adoption of new approaches by the commercial banks. II. LITERATURE REVIEW Banking sectors are essential for the country’s economy, since no growth can be achieved unless savings are efficiently channeled into investment. In this respect, the lack of a full-fledged banking sector has www.iosrjournals.org 69 | Page A Construct Validity of Investment Decision in the Banking Sector in Libya (SEM Approach) often been identified as a major weakness of the centrally planned economies. Therefore, reforming the banking sector in many countries around the world and creating a new culture of trust and confidence has been a crucial task in the process of transition into a market economy [4]. Most Governments around the world pay attention to improving reforms and liberating the financial and banking sectors, because of the vital roles these institutions play in enforcing the growth of a balanced and unshaken economy [4, 5]. During the past years, practical experience improved the ability of the economy to face external crisis. This depended on how strong both the financial and banking sectors were because of the huge contributions in raising the efficiency of the economy in order to achieve stability. Due to the strong and outstanding banking sector of markets and institutes with excellent instruments were mobilized with local assets and were assembled in the form of credits and investments. These instruments were then directed towards the economic sectors and the activities especially indicated extra benefits and brought in more profits. This sector would also be able to attract foreign investment funds in order to provide more funds to cover the local development needs [6]. One of the most important objectives of the banking sector which focuses on the customer is to meet all the needs of the customer. However, in order to compete successfully, and establish loyalty, an enterprise can maintain customer satisfaction by continually improving and developing new and better services as customer satisfaction is dynamic and changes with time [7]. 2.1 Banking Sector Environment in Libya The banking sector in north Africa has for long time been rather challenging because the local banks are often unstable and use traditional information service methods. This has resulted in the government and the industries to rely on international banks [8]. The North African government has regulated heavily the banking sector and has imposed strict limits on international competition. In recent decades, the reforms in the banking sector have become the priority of the IMF and the World Bank. One important improvement was in obtaining permission for the increased presence of foreign banks. For example, Egypt has been most successful in attracting local operations of the foreign banks. The manual systems applied by most of the banking sector in the North African countries are barriers to operational efficiency, as well as information service quality. It also slows down trading and information production of these banks. It is important that the North African banks adopt fast automation and electronic information systems in order to attract more customers. They will then have the trust and satisfaction in the information service of the banking sector of these countries [8]. The Libyan authorities have begun to liberalize the national banking sector in the mid-1990s by permitting private ownership of banks. This was introduced only since 2001 with the liberalization of foreign trade that allowed banks to experience substantial changes in the banking system. Foreign interests in the Libyan banking sector is growing and developing every year. Currently, commercial banks account for a tiny proportion of banking activities while the private companies access to credit remains severely restricted. Therefore initiating new systems with more flexibility for the Libyan customers is an essential need [9]. 2.2 Investment Decisions According to Anthony and Mustafa [10], the decision to invest is not just a mathematical selection of expected returns on various risk profiles but a whole range of factors- such as political, economic, social etc. These factors could have a profound effect on investment decisions. Tarek [11] has further emphasized the classification of investments into two groups mainly the financial and the non-financial. The former refers to the concept of interest bearing or dividend yielding assets such as stocks, bonds, shares and other forms of securities that are traded in the stock market. The latter group refers to what is generally described as real investments that usually come in the physical form e.g. buildings, equipment and machinery. Some theories have been put forward so as to enhance the comprehension of the characteristics of investment behaviour and performance. One of these theories places emphasis on the influence of financial factors in two dimensions, the first the theory is of profit developed by Sharpiro. This theory sees profit (especially undistributed refrained earnings) as a source of internal fund for financing investment. It defines investment as a function of profits, which depends on the level of corporate income or earnings. Andersen [12] described decision making as a human cognitive process which leads to a course of action among a set of choices making a decision involves choice which can be an action or an opinion. In the context of modeling investment decision making in finance, by far, a majority of models assume that decision making is a reasoning process which is rational [12].