Central Bank of the United Arab Emirates
The Central Bank of the United Arab Emirates The history and development of the Central Bank • Oil, Wealth and Banks Before the establishment of the UAE on 2 December 1971, commercial banking activities existed to meet the limited demand of local communities and to finance mainly international trade. The British Bank of the Middle East which was set up in 1946 in the city of Dubai was the first bank to offer its services to a flourishing trade center. ... Eastern Bank opened its doors in 1961 in Abu Dhabi, followed by Ottoman Bank in 1962. Eastern Bank merged later with Chartered Bank, Ottoman Bank with Grindlays Bank. The first national bank, the National Bank of Dubai, was established in 1963. The second national bank, The National Bank of Abu Dhabi, was established in 1968. ... Licensing of banks was done by local emirates government. ... The number of persons served by one bank office increase from 2370 persons by the end of 1973 to 3347 persons by the end of 1975, as a result of the increase in population to 656 thousand in 1975. ... Bank high liquidity ratio rose from around 4% in 1973 to 6. ... Consequently, the Board supported the establishment of the Banks United Association, issued regulations for banking practices including the setting of ceiling on interest rates on deposit in local currency and periodic publication of the best buying and selling rates of foreign currencies. Noting the rapid increase in the number of licensed banks, it decided not to license any foreign bank to open branches or representative offices in the UAE for a two year period beginning January 1975, while new national banks may be licensed provided that the share of national would not be less than 80 percent. ... The number of persons per bank office went down to 2728 persons despite a new banking regulation issued in 1976 permitted licensing of foreign banks under the term "Restricted License Bank". ... b) Non-bank financial institutions would be subject to Currency Board supervision. ... e) Specific instructions would be given to banks, from time to time, concerning the ratio of their loans to total deposits (excluding inter-bank deposits) so that they would be required to lower it to 100% each time it exceeded this limit. These new regulations represented a basic shift in the role of the Currency Board; namely it started to act as a Central Bank. ... The Distribution of Bank Credit to Residents (BCR) continued to emphasize the past trend, namely; continued increase in the share of the Construction Sector (32. ... Every bank whose loans to total deposits ratio exceeded 100%, had to lower it. ... As population continued to increase appreciably, the number of persons served by a bank office increased to 3233 persons by the end of 1981. As a result of a large increase in net foreign assets, and strong expansion in bank credit, Total liquidity (M3) jumped from AED 19. ... This growth, economic and financial, heralded new era in the dynamic development of the UAE, as 1981 represented the epic of cyclical economic growth and it was, also, the first year in the existence of the UAE Central Bank. ... The Central Bank of the UAE Dec. ... 10 of 1980 defined the objectives of the Central Bank as "to direct the monetary, credit and banking policy and supervise over its implementation in accordance with the States general policy and in such ways as to help support the national economy and stability of the currency." To attain its objectives, the Central Bank shall: • exercise the privilege of currency issue • endeavor to support the currency, maintain its stability internally and externally, and ensure its free convertibility into foreign currencies, • direct credit policy in such ways as to help achieve a steady growth of the national economy, • organize and promote banking and supervise over the effectiveness of the banking system. • undertake the functions of the bank of the Government. • advise the government of financial and monetary issues • maintain the Governments reserve of gold and foreign exchange • act as the bank for banks operating in the country The Central Bank is empowered to use several instruments such as: a. ... The maximum amount of discounts loans and advances that may be granted by any bank as of a certain date. ... The maximum amount that they may be lent by a bank to any one person physical or juridical, in proportion to its own funds, 3. The proportion of deposits that must be maintained on reserve with the Central Bank, (Reserve Requirement ratio) 4. The minimum required margins to be deposited in cash by bank customers to cover the opening of letter of credits, 5. ... To sell and manage, directly or through commercial bank, governments treasury bills or the notes or bonds that the government would issue or that were issued by any public institutions or agency and guaranteed by the government, • Consolidation, Orientation and Preparation The Central Bank Law was issued on 2 August 1980. ... The management (Board of Directors) of the Central Bank was keen on implementing the provisions of the law as soon as possible without causing undue disruption or malfunctioning in the banking and financial sector. Organization and Consolidation The Management of the Central Bank started first by redefining the role of and restructuring the various departments so the Central bank would move at very high level of efficiency to meet the various challenges that were inherited from the past and those expected in the present and the future. ... However, it was found that lot of information and cooperation by all concerned parties were need to hit the target • Orientation and Policy Actions Cashing on the accumulated experience of the Currency Board, the Central Bank wasted no time in moving to restrain the proliferation of banking units. ... On the monetary and credit policy front the Central Bank cancelled interest rates on ceiling on dirham deposits thus deregulating the money market and driving toward the new objective of monetary policy, i. ... It was decided that no interest rate would be paid on reserve requirements deposited with the Central Bank regardless whether they were taken on dirham or foreign currency deposits. ... The Central Bank would sell and buy dollars from banks and governments-federal and local. ... In reality the dirham has been pegged to the US dollar, as the Central Bank did not change this rate when the dirham was above the higher margin of its link with the SDR now when it was below the lower margin. Preparation and more Transparency The Central bank moved quickly to implement two of its most important articles: Article 99 and Article 104. Article 99 stated that "There shall be within the Central Bank a department for supervision over commercial banks, investment banks and financial institutions." "The Board of Directors shall determine the way said department is set up and define the functions and conditions of operations of the corps of Bank-inspectors. ... "Within the terms and conditions specified by the Board of Directors, the Bank may establish at its headquarters a separate department to be called the credit Risks Bureau". ... Such information and data shall be filled in forms prescribed by the Bank, in accordance with its instructions, and within the time limit it sets. ... High caliber auditors and officers were recruited including from experts from the Bank of England and the International Monetary Fund. ... The information gathered was extremely important and so timely that it enabled the Central Bank to take several measures that prevented later the collapse of the banking system when the severest economic recession hit the country in the period 1983-1986. ... Three banks in Dubai merged into one bank. Another three banks in Abu Dhabi merged into another bank. ... The Central Bank acted as a lender of last resort and provided temporary financial help according to the provisions of its law. ... It is interesting to note that because of the dynamic evolution of the UAE economy and the effect of the economic recession, a structural change took place in the distribution of Bank Credit to Resident (BCR). ... However, banks, supported by the Central Bank, were able to meet all demands. ... The number of persons per bank office rose to 6,406 as the total number of population reached 1,909 thousand by 1991. ... Reorganization and Preparation (Dec 1991 to present) By the end of 1991 the Central Bank had new management. ... • New Management: New Priorities The new management embarked on restructuring the Central Bank department. ... Meanwhile, monetary policy instruments were sharpened and expanded to improve the control of the Central Bank on monetary aggregate developments. ... Instruments of Monetary Policy The Central Bank has been using the fixed exchange rate and a system of completely free movements of capital as a means to let excess liquidity moves out of the country. ... The instruments available to the central bank to exercise monetary control and influence short-term movements of the monetary aggregates are few and of limited effectiveness. ... 5-7 percent, and required reserves (including foreign currency deposits) held by the Central Bank bear no interest. ... The central bank discourages banks from makin net short-term dirham placements abroad through a non remunerated reserve requirement of 30 percent on banks net dirham deposits abroad with a maturity of one year or less. The banks excess reserves held at the central bank are negligible. ... Central Bank Certificates of Deposits (CDs) Certificates of deposit (CDs) operate as a form of repurchase agreement and have been issued by the Central Bank as another tool for liquidity management. ... dollar) than Central banks selling price (Dh. ... Banks can discount their CDs at the Central Bank at any time, and penalties on early redemption are very small. ... Overdraft facility The Central Bank provides an overdraft facility to commercial banks which allows them to utilize their reserves free of charge for upto six days. ... In case this requirement is not met a penalty of 50 per cent per annum is charged by the Central Bank on the overdrawn balance. ... The supervisory body is the Supervision and Examination Department of the Central Bank. The supervisory process includes the analysis of monthly, quarterly and semiannual returns and annual audited balance sheets prepared by auditors and approved by the Central Bank. ... With regard to foreign banks, the examination looks into two additional issues; i) the extent and quality of supervision by the head office abroad, and ii) the financial strength of the banking group as a whole at a global level, and the willingness of the head office to support the bank branch in case of financial difficulty. ... Central Bank proposed that all domestic banks move toward adopting International Accounting Standards (IAS). ... Authorization from the Central Bank is required for any payment of dividends. ... Risk Bureau Reporting System This is a service of credit-risk assessment provided by the Central Bank to Commercial Banks. At present banks report on a monthly basis to the Central Bank a list of clients who have borrowed in excess of Dhs. ... The Central bank is currently reviewing various proposals to improve the entire system by interdicting a new reporting form. ... It is prohibited to include private houses, and individual or bank guarantees as securities for personal loans. ... Large Exposure limits With a view to curbing the excessive concentration of credit a single borrower or a group of related borrowers, the Central Bank issued on July 16, 1994 an update of circular 19/93 relating to the monitoring of large exposure limits to banks, banking groups, members of a banks board of directors, and the banks own employees. • New Circulars During the 1997-98 the Central Bank issued three new circulars. ... The second circular also relates to bank loans extended to finance purchases of company shares in IPOs. ... In response, the Central Bank issued circular 19/97 (November 4, 1997).