UAE Banking System: Stable and Resilient

Mehmood Ul Hassan Khan

Banks big and small are sinking around the globe by each passing day. Central banks of the world have failed to adjust financial shortcoming of the banking systems in the aftermath of global economic recession and financial crunch in 2009. Now, world banking system is trampling, producing serious socio-economic problems for the governments and people alike. On the contrary, the banking system of the United Arab Emirates (UAE) is stable and resilient. Its central bank has played very important role to diminish the bad ramifications of the regional turmoil and global economic recession.

Domestic Banking Industry

According to the annual report of the UAE central bank (2011), the number of locally incorporated commercial banks stood at 23 during 2011, while the number of their branches increased from 732 at the end of December 2010 to 768 at the end of December unchanged 2011, and the number of their electronic/customer service units remained at 26.

The report indicated the total assets increased from AED 228.9 billion at the end of 2010 to AED 234.3 billion at the end of 2011. Commercial banks’ Current Accounts and Deposits at the Central Bank increased from AED 68.6 billion at the end of 2010 to AED 83.3 billion at the end of 2011.

The facilitating monetary policy of its central bank has initiated diversified but integrated policy measures which have made banking and financial sectors of the UAE the safe heavens for investors, businessmen, lenders and the last but not the least, depositors. Even the recently happened debacle of global markets could not pose any threat to the UAE banking system. The central bank introduced large fiscal stimulus in response to the 2009 global economic and financial crises.

IMF Findings

The International Monetary Fund (IMF) said that the UAE banking system does not show any signs of distress and the funding situation of local banks has stabilized. The recently published report further said that the stress tests show that the banking system could address moderate external liquidity shocks with its own resources, and that the stock of central bank foreign currency reserves would be sufficient to address even a strong shock scenario.

The IMF noted that the UAE banking system is moderately exposed to Europe. Foreign liabilities of the banking system are about 19 per cent of total liabilities. Lending from EU periphery banks to the UAE is very small, but lending by banks from core Europe is considerable.

Capital Adequacy Ratio

According to the report, banks in the UAE have an average capital adequacy ratio of 20 per cent and a Tier 1 capital ratio of 15 per cent. The report said since 2008, the central bank and policy makers of the UAE have taken measures to strengthen some of the weakness in the system due to which banks have been recapitalised and the capital adequacy ratio of the banking system has strengthened to 21 per cent. Furthermore, weaker financial institutions, including banks, have been merged with stronger institutions. The liquidity of the banking system has also improved as indicated by the steady decline in the loan-to-deposit ratio, from 108 per cent at end-2008 to 95 per cent at end-March 2011.

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Central Bank’s different policy measures

According to the UAE central bank web-page it has initiated different meaningful policy measures for the overall betterment of its banking system operation and supervision in recent months. Its decision to capping bank lending to government bodies is right move in right direction. The regulations limit banks to lending a maximum of 100 per cent of their capital base to government entities, with no more than 25 per cent of a bank’s capital to be loaned to any individual government borrower. Furthermore, the central bank also imposed a 100 per cent limit for lending to federal and emirate-level state-related enterprises, with a cap of 15 percent for funded exposure to individual borrowers.
Moreover, introduction of the insolvency laws are necessary to overhaul bankruptcy procedures in the country and achieve international standards.

Different Circulars Content Objective
Regulation No. 29/2011 dated 23-02-2011 Regulation of loans and other services offered to individuals Upholding the transparency among banks, finance companies and customers
Notice No. 1501/2011 dated 8-03-2011 Implementation of IBAN Payment system in consistence with the federal government strategy
Notice No. 7181/2011 dated 15-09-2011 Requiring banks and other financial institutions to provide the central bank with the name and other details of board of directors members and names of shareholders who own 5 percent or more of the total shares of the institution Make sure that directors and shareholders of the banks have the appropriate experience and soundness of characters to protect the interests of all stakeholders
Notice No. 9278/2011 dated 22/12/2011 Requiring banks and finance and investment companies and their external auditors to make sure that provisions and final accounts are made in consistence with Notice No.28/2011 Make sure that audited financial statements reflect the financial position of the insinuations
Source: Annual Report of the UAE Central Bank (2011)

Better Regulatory and Supervisory Mechanism

UAE central bank has developed an advanced system of internal reporting and early warning in order to continue to closely monitor the liquidity of individual banks and encourage them to proactively manage liquidity risks. Provisioning of the loans has been monitored. Risk assessment culture has been institutionalized to conduct regular stress testing of the domestic banking industry. It would help further mitigate risks to the banking system and strengthen financial stability in the country.

Central Bank First Quarter Report (2012)

The UAE central bank first quarter report (2012) said that lending in the country increased 0.3 percent, while deposits registered 7.1 percent increase in the first three months of the year. According to the report, loans rose 0.2 per cent month-on-month in March to Dh1.074 trillion, while bank deposits increased by 3.3 per cent to Dh1.146 trillion over the same period. Total bank deposits jumped by 3.3 per cent during the month of March 2012 to close at Dh1.146 trillion.

Money Supply M1

The report indicated that the money supply aggregate M1 (comprises currency in circulation plus monetary deposits, i.e., current accounts and call accounts at banks) increased by 1.4 percent, from Dh276.3 billion at the end of February 2012 to Dh280.2 billion at the end of March of the same year.

Money Supply M2

The report further elaborated that the money supply aggregate M2 (M1 and resident time and savings deposits in dirhams, commercial prepayments in dirhams and resident deposits in foreign currencies) maintained upward progress by 2.8 percent, from Dh856.3 billion at the end of February 2012 to Dh880.4 billion at the end of March of the same year.

Money Supply M3

In addition to this, money supply aggregate, M3 (M2 plus government deposits at bank operating in the UAE as well as at the central bank) increased 3.8 percent, to Dh1.075 trillion at end of March from Dh1.036 trillion at the end of February.

Arabian Business List (July, 2012)

The Arabian Business has issued a list which shows 14 UAE banks on the list of top 50 banks in the Gulf Cooperation Council (GCC). It is based on market value in which the highest ranked UAE bank is National Bank of Abu Dhabi, placed seventh with a market value of $8.71 billion.

Name of the Bank Market Value US$
First Gulf Bank 6.900 billion
Abu Dhabi Commercial Bank 5.179 billion
Emirates NBD 1.964 billion
Mashreq Bank 2.991 billion
Abu Dhabi Islamic Bank 2.015 billion
Dubai Islamic Bank 1.964 billion
Union National Bank 1.888 billion
National Bank of Ras Al Khaimah 1.618 billion
National Bank of Fujairah 1.587 billion
Commercial Bank of Dubai 1.480 billion
United Arab Bank 841 million
National Bank of Umm Al Quwain 788 million
Emirates Islamic Bank 731 million
Source: Arabian Business (July, 2012)

The above table clearly indicates the core strength of the UAE banking system which banks have the largest market value in the GCC.

QNB Group (May, 2012)

According to the report of the QNB (2012), the UAE banks have the largest share of banking assets in the GCC that increased by 8.9 percent in 2011 to US$1.46 trillion, equivalent to 106 percent of regional GDP. Moreover, the UAE banks account for 31 percent of the total assets in the GCC. The report indicated that the UAE has the highest level of domestic loan penetration, 78 percent of GDP, primarily as a result of extensive lending to all the productive sectors of the economy. The recently published report of the National Bank of Kuwait, NBK also endorses this view.

Institute for International Finance (IIF), Washington

According to the Institute International Finance (IIF) report, UAE banks emerged as the strongest financial institutions in the GCC in terms of capital adequacy. The report observed capital adequacy in the UAE, which controls the largest Arab banking system by assets, stood at as high as 20.8 per cent at the end of 2011.
(in billion of AEDs)
2010 2011
Total Foreign Currency Assets 153.4 169.4
Central Bank’s investments abroad in highly rated securities, government bonds and treasury bills 68.4 72.3
Deposit account, cash with banks abroad and loans to banks against certificate of deposits 47.8 59.0
Central bank investment in local government bonds 36.7 36.7
Other foreign assets 0.5 1.4
Earnings for the year from treasury operations 1.2 1.3
Source: Annual Report of the UAE Central Bank (2011)

The UAE central bank’s foreign currency assets increased to Dh169.4 billion in 2011 from Dh153.4 billion in the previous year. Its investments abroad into highly rated securities, government bonds and treasury bills rose to Dh72.3 billion from Dh68.4 billion in 2010.

Concluding Remarks

Although, UAE domestic banking system is stable and resilient but it is strongly suggested that UAE must develop domestic debt markets. It would quickly facilitate banks liquidity management and help reduce reliance on foreign funding. Central bank capping on the UAE’s government related entities’ (GREs) debt is significant policy measure to make safe the best interests of the banks. Close monitoring of the banks and financial institutions, managerial skills and risk management are must to cope with any adverse situation in the country. The central bank being the apex bank of the country must support banks to prepare its liquidity management for the introduction of the Basel III liquidity framework.

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