The United Arab Emirates (UAE) forms a Federation of states funded in 1971 when British withdrew from the Arabian peninsula. It gathers seven sheikdoms: Dubai, Abu Dhabi, Sharjah, Fujairah, Ras al-Khaimah, Uum al Quwain and Ajman. Each emirate is ruled by a local representative with its own government and political institution and has control over its sovereign functions: commercial activity, natural resources…However remaining functions of first importance, such as Defense, Foreign policies, immigration, or macroeconomics… are delegated to a Supreme Council of seven members (one representative for each emirate).
Decisions are taken at a majority of five. On a broader scale, UAE belongs to some regional organization like MENA (Middle East and North African countries), OPEC (Organization of the Petroleum organizing countries), GCC (Gulf Cooperation Council), and global institutions such as WTO (World Trade Order), IMF (International Monetary Fund). Socio-demographic indicators: In 2012, the population was near 7. 8 million of inhabitants, with a majority of expatriates (only 800,000 Emiratis, against 7 million of expatriates, that’s 90% of UAE total population).
The GDP per capita was one of the highest in the world with 49,800$ per inhabitant. The unemployment rate in the United Arab Emirates is reported by the Central Bank of the UAE. From 1985 to 2012, it averaged 3. 1%, with an historical record of 4. 6% in 2011. In December 2012, the unemployment rate in the UAE decreased to 4. 2%. The Mister of Labour declared that fixing unemployment was now of top priority and declared 2013 as the “Year of Emiratisation”. This initiative aims at employing UAE citizens in a meaningful and efficient manner in public and private sectors, giving them a priority over application processes.
Expatriates operating in UAE would progressively be replaced by local citizens. UAE Economy: The UAE is the Middle East’s second largest economy after Saudi Arabia and one of the wealthiest countries in the region on a per capita basis. The UAE is the eighth largest producer of crude oil and 18th largest producer of natural gas in the world, with January 2012 reserves estimated at 97. 8 billion barrels and 6. 09 trillion cubic meters, respectively (ranking eighth in the world for both commodities). Its estimated GDP in 2012 was 284. 4 billion $, a real GDP growth rate of around 3.
1%. The economy is dependent mainly on oil and natural gas but successful efforts at economic diversification reduced oil- and gas-based output to 25 per cent of GDP in 2011, while goods and services accounted for an estimated 87. 5 per cent. The balance trade surplus in 2012 was around 80 billion $, thanks to 300. 9 billion $ of exportations (among which 45% of crude oil) against 220. 3 billion $ of importations (machinery, foods, chemicals…). In 2012, the inflation rate increased from 0. 9% to 1. 1%. The public represented 43. 3% of GDP. The external debt reached 163.
8 billion $. Gold & FOREX Reserves amounted 42. 97 billion $. The exchange rate equaled AED/USD = 3. 673 UAE’s economy is mostly driven by its two largest emirates, Abu Dhabi and Dubai which contribute respectively to 60% and 26% of UAE total income. Abu Dhabi which is also the capital of the federation, relies mostly on exports of natural resources (oil and gas) and on its financial services, while Dubai’s economy is based on real estate, tourism, media, communication and leisure. These antagonisms could have a negative impact over UAE growth.
Indeed, it is very important to consider that the economic and financial situation of each Emirates is likely to have consequences in term of credit ratings and exchange rates and then weaken the whole Federation. It was particularly obvious in 2009, when World Dubai, Dubai major investment group was indebted to 60 billion $ due to its real estate activities and excessive construction programs. This situation fueled economical and political tension between Dubai and Abu Dhabi, which is more favorable of a strict budget monitoring, but agreed all the same to repay 30% of World Dubai debt
to 20 billion $, through the central bank. UAE banking sector Besides conventional banking, UAE also offers Islamic banking (products and services aligned to Sharia compliance) which has seen a tremendous growth in the recent years. Most of the banks operating in UAE have an Islamic branch or department. There are 23 locally incorporated commercial banks operating in UAE since 2011 with some 768 branches, compared to 28 foreign banks with 110 representative offices registered. In accordance with Union Law n°10, foreign banks need to obtain a license from the central bank before operating in the UAE.
Since 2006, CBUAE has stopped granting new licenses with few exceptions for institutions from GCC. There is a small concentration within the banking industry. Indeed, Top 6 of commercial banks control 70% of total assets. Despite the global economic crisis in 2007 and the real estate crisis UAE had to face in 2008, the banking system of the United Arab Emirates is said to be stable and reliable according to the International Monetary Fund (2012) “The banking system maintains significant buffers to withstand a further deterioration in asset quality and external liquidity conditions.
The central bank should nonetheless continue to closely monitor banks’ liquidity and capital buffers as individual banks could be affected if downside risks materialize” International Monetary Fund – 2012 Indeed, UAE banks have the most important volume of total assets among Arab countries. Total assets of UAE banks stood at Dh1. 66trn ($452bn) at the end of 2011 –assets-to-GDP ratio 137%. The UAE banking sector has grown about 30% y-o-y for the past 5 years, making it one of the fastest growing economies worldwide. They have also a strong capital structure with a capital adequacy above 10% and often beyond 18%.
Actually this is far beyond the 8% required by the Basel III Committee. The loan to deposit ratio remain high nearly above 1, which may indicate potential problem of liquidity. However, Liquid Assets/Total Assets ratio equaled 19. 4% in 2012 against only 6. 3% in 2008, which tend to indicate that the liquidity situation is improving, even if additional efforts will be necessary to reach the 26. 9% registered in 2005, before the crisis (cf. Appendices). Over the past 4 years, banks have increased their liquid assets ratio, distribution network and impaired loans ratio.
Simultaneously, the loan-to-deposit ratio has decreased to 86%, and Margins and Costs to Income Ratio has also declined significantly. 2. History of the Central Bank In 1971, UAE formed an independent state. In may 1973, The Currency Board was mandated to issue the national currency , the UAE Dirham. On 10 December 1980: “Union Law No. (10) of 1980 Concerning The Central Bank , The Monetary System And Organization of Banking” was issued, creating the Central Bank of the UAE and providing the Central Bank with authority over the organization of the monetary and banking systems in the UAE.
This includes the organization of monetary, credit and banking policy in the UAE and the supervision of its implementation. During the 1980ies, several measures were taken to strengthen the banking structure (audit, reporting standards, requirements) (cf. Appendix 2) 3. Organization of the Central Bank The members are appointed by a Union Decree after approval by the country’s Council of Ministers, and they serve for 4 years. Members of the Board are disallowed from serving on the board of any commercial bank; they may not be serving members of the UAE Federal National Council or be Ministers of Cabinet. Board of directors Name Position H.
E. * Khalifa Mohammed Al Kindi Chairman H. E. Khalid Juma Al Majid Vice Chairman H. E. Sultan Bin Nasser Al Suwaidi Governor Younis Haji Al Khoori Director Khalid Ahmed Altayer Director Khalid Mohammed Salem Balama Director Hamad Mubarak Bu Amim Director (*H. E. = His Excellency) Senior Management Name Position Mohammed Ali Bin Zayed Al Falasi Deputy Governor Saeed Abdulla Al Hamiz Assistant Governor for Banking Supervision Saif Hadef Al Shamsi Assistant Governor for Monetary Policy and Financial Stability The Central Bank of the United Arab Emirates has five branches, seven departments, seven divisions, seven units and the Risk Bureau.
Its branches are in Dubai, Sharjah, Ras Al Khaimah, Fujairah and Al Ain. The central bank 7 Departments: Banking Supervision and Examination: This Department is responsible for setting the standards regulating the sector and processes applications for licenses. The bank has to cooperate internationally with other regulatory authorities, such as the Bank for International Settlements, the International Monetary Fund, and the World Bank. Banking Operations: Consists of five sections: 1. Currency Notes & Coins Section 2. Vaults and Strong Room Section 3. Banking Operations Follow-up Section.
4. Banking Operations Statistics Section 5. Check clearing This Department supervises the printing and launching of new banknotes. They also feature the most upto-date security marks. Research and Statistics: It is the main source of monetary and banking statistics Administrative Affairs: It consists of 5 elements: 1. The Purchasing Section 2. The Maintenance Section 3. The Correspondence and Archives Section 4. The Security and Guards Section 5. The Library Financial Control: The functions are to monitor, control and report on the financial aspects of the Central Bank.
Treasury: It is responsible for the day-to-day management of the Central Bank's reserves. Internal Audit: 1. It has to perform pre-audit procedures on all transactions 2. Continuously ensure the proper functioning of computer security system 3. Perform post-audit procedures on expenditures of the Head office The central bank 7 Divisions: 1. Information Technology: This division studies manual systems and the feasibility of their automation in the Central Bank. It develops programs required for automation. 2. Personnel: It is composed of three sections: ? Staff Salaries & Expenditure ? Contractual and Individual Affairs.
? Development and Training Section 3. Correspondent Banking: It consists of three sections, Correspondents, Financial Analysis and Test Keys. The Division aims to followup international credit risks to reduce risky placements. 4. Public Relations: It is entrusted with contacts with the media for the publication of Press Releases, Circulars and Directives issued by the Central Bank. 5. General Secretariat and Legal Affairs: It handles secretarial works for the Board of Directors and the Executive Committee. It also provides legal counsel to the Board, the Governor and other Departments of the Central Bank.
6. UAE SWITCH: It’s the execution of the Electronic SWITCH project; it aims to connect the automated teller machines (ATMs) of banks operating in the country through a unified network. 7. The Governor's Office Division: Prepare responses to correspondence, in both Arabic and English languages, received from local entities and entities outside the UAE. The central bank 7 Units: 1. The Anti-Money Laundering and Suspicious cases Unit: It was created to enhance the Central Bank's actions in support of international efforts to combat moneylaundering and the financing of terrorism.
2. IT Projects Unit: The unit is responsible for delivery of all major IT Projects. 3. The Strategy Unit: Its function is to make sure good implementation of Central Bank's Strategy. 4. The legislative Development Unit: This Unit handles the review of economic, financial and banking laws. 5. The Banking and Monetary Statistics Unit: It main action is to prepare all needed banking and monetary statistics. 6. The Financial Stability Unit: The Financial Stability is the smooth functioning of the components within a county's financial system. 7. The Benchmarking Unit:
The function of this unit is to prepare benchmarks related to low-risk debt instruments and the yield curve. The central bank Risk Bureau: It provides information to lending institutions, operating in the UAE, about applicants, with the following systems: ? Risk Bureau's Commercial Credit System The new system will follow the great progress of information technology and utilize new computer facilities. ? Returned Cheques System “RCS” is an online database containing names of persons and commercial establishments that 4 or more cheques are returned during a year.
? Customer Rating System It is an online database with names of individuals who failed to honor their obligations towards those banks. 4. Objectives of UAE Central Bank Economic growth The big differentiation that we can do in the economic structure of the UAE is between the oil sector and the non-oil sector. Oil sector is really important and has a big impact on the economy. If the sector knows a slowdown, it’s the whole economy of the area that is impacted. At the end of 2013, GDP growth will slow because of a reduced output and lower prices.
The dependence to the oil sector encourages the central bank to develop the non-oil sector. The sector expanded in 2013 by 4. 1 %. This was allowed thanks to the general stability of UAE, with the boom for retail, tourism and service sectors. We can observe a strong domestic demand as well. The growth keeps honorable level in 2013 thanks to these sectors. In 2014, they expect a growth recovery. We can explain it first by the takeoff of global growth after this crisis period. As we said before, the non-oil sector will keep strengthening and in parallel the drag from oil sector will ease.
So the objectives for UAE Central Bank regarding the economy are to continue to strengthen non-oil economic growth and take up good growth rhythm of oil production. Inflation In order to control inflation, the UAE Central Bank wants to create additional more effective monetary policy with two mains goals: influence money supply and prices and control imported inflation. To reach these objectives, the Central Bank will: ? Introduce new saving instrument in order to absorb excess liquidity in the economy and to put more productive use in generation growth engines. ? Encourage banks to invest their capital through foreign channels to negate the effect of excess liquidity in the local system and reduce domestic inflationary pressures. ?
Ensure that up-to-date inflation related data will be provided to the market ? Give close attention to the supply and demand of goods and services with high impact on Consumer Price Index (CPI) Exchange Rate Exchange rate is the third main objectives of the Central Bank. The goal is to maintain a fixed exchange rate of the Dirham against the US Dollars in order to: ? ? ? Serve its oil-based economy Support its counter-cyclical policy Stabilize the government inflows and outflows.
Otherwise, the Dirham exchange rate is expected to fluctuate according to the oil price fluctuation. That would harm the UAE ability to plan and control their budget. 5. Central Bank Instruments Monetary policy is a term used to refer the actions of central banks to achieve macroeconomic policy objective such as price stability, full employment and stable economic growth. Central banks are leading monetary policy by using different tools. 4. 1) How central banks control money? To control money, central banks used three main tools: interest rates, open-market operation and reserves requirements.
? Central banks can control the level of short-term and long term interest rates. For example, if interest rates decrease, the cost of credit will be reduced and more people and firms will borrow money and the economy will heat up. ? Open-market operations: it is when central banks buy and sell government securities in the financial market. Thanks to this tool, central banks can influence the level of reserve in the system. ? A very important tool to control money supply is Reserve requirements; it is the amount of physical funds that depository institutions are required to hold in reserve against deposits bank account.
This determines how much money banks can create through loans and investment. In the Emirates, the level requires is 14%. ? Thanks to these tools, central banks change the level in money supply which permits to apply monetary policy. 4. 2) Mainlines of monetary policy in the UAE The main objectives of the Central Bank in the United Arab Emirates are to ensure a balanced growth and maintain exchange rate of the Dirham against the US dollar. The CBUAE (Central Bank of the UAE) uses some instruments to achieve its operation target.
First, CBUAE uses the Dollar/Dirham swaps for Dirham liquidity. Indeed, the CBUAE injects Dirham liquidity in case a bank needs access to Dirham. These swap arrangements involve a simultaneous sale and forward purchase of Dollars against the purchase/forward sale of equivalent Dirham amount for a fixed term at specified forward rates. Other Qualified Monetary Instruments that the CBUAE uses include: ? Minimum Reserve Requirement which is 14% on current, savings and call accounts. ? Certificates of Deposit and Repo facilities on Certificates of Deposit which are called Repurchase agreements.
They are short-term borrowing for dealers in government securities; Dealer sells the government securities to investor and buys them the following day. Central banks use it to increase short term capital (reserves). ? Liquidity Support Facility, this tool is used by the central bank of UAE to allow banks to borrow money through repurchase agreements. Thanks to this tool, banks can respond to liquidity pressure and assure stability. ? Advances and overdraft facility for banks which provide loans and advances for up to 7 days without collateral, and for up to 6 months against collateral. ? Prudential Regulation. 4.
3) Monetary policy in the UAE linked with US policy There is an implicit peg of dirham to the US dollar. Indeed, Dirham is pegged to the Saudi Arabian riyal which is peg to the US dollar. Before 1998, there were several troubles to maintain the peg. The fixed exchange rate against dollar stabilizes the government budget (inflows and outflows). Thanks to this fixed exchange rate regime, UAE’s central bank can balance the fluctuation of economy due to changes of oil prices. Indeed, if the Dirham was not pegged with the dollar, exchange rate would fluctuate according to oil price fluctuations which are very volatile.
UAE can plan and control their budget. Their strong oil revenues helped boost reserves and US dollar inflow permits to support the Dirham. The UAE central bank controls interest rate movement based on US dollar value and the oil market. We expect the UAE to maintain its current dollar peg at 3. 67 (1US$ = 3. 67 AED). The central bank governor, Sultan Nasser al-Suweidi, has reiterated the country's commitment to the dollar. Indeed, with a lower inflation (2%) and stronger US dollar, Central Bank does not need to adjust the emirates’ dollar peg. Please see appendix 4. 1 Financial Market: medium term Outlook.
4. 4) Monetary policy linked with the Gulf Cooperation Council (GCC) UAE is part of the GCC, it’s a customs union between UAE, Saudi Arabia, Kuwait, Qatar and Bahrain, which started in 2003. Since this date, they have failed to open borders because of concerns regarding security and trade. In March 2009, the GCC started talking about the possibility of single currency. United Arab Emirates were very reluctant because they think it is too risky with low viability. 4. 5) How UAE Central Bank control the crisis of 2009 The government injected liquidity in order to reduce the effect of the financial crisis.
First, the government established an AED50-billion (USD14-billion) credit facility for banks operating in the country, guaranteed bank deposits and inter-bank lending. Secondly, government injected cash directly into banks through a AED 70-billion liquidity provision scheme. Finally, in February 2009 injected AED 16billion into the five largest banks owned by and based in that emirate to help bolster consumer and investor confidence. The Central banks kept interest rate low to provide liquidity to the banking sector. First, the Central Bank decreased short-term interest rate in 2009. Please see appendix 4. 2 Short term Interest rates.
Secondly, Central bank decreased Inter-Bank rate (Emirate Inter Bank Offered Rate EIBOR). Indeed, the one-month EIBOR eased to 1. 5% at the end of December 2009, from 2. 1% in June 2009 and 4. 2% at year-end 2008. 2010, EIBOR rates rose given concerns over Dubai's debt troubles and ongoing crisis in Europe. In the wake of Dubai World's debt restructuring, however, inter-bank rates have edged lower, sliding from 1. 8% in September 2010 to 1. 5% at the end of 2011, and edged down to 1. 3% in December 2012. Thanks to these actions, liquidity has increased. Please see appendix 4. 3 and 4. 4 Money Supply Evolution M2 and M3.
Money supply aggregate M2 which comprises of M1 and quasi-monetary deposits (resident time and savings deposits in Dirhams, commercial prepayments in Dirhams and resident deposits in foreign currencies), was Dh 867. 5 billion in November 2012. According to the Central Bank, money supply aggregate M3 (M2 plus government deposits at bank operating in the UAE as well as at the Central Bank) was DH 1,097. 4 billion at the end of November 2012. 4. 6) Monetary policy in the UAE – Recent development and forecasts First, loan growth remains weak in 2012: growth in bank lending rose to 3. 5% (AED 260. 9 billion), bank deposits jumped to 9.
2%. The consequence was that the loan to deposit ratio reduced to 94%. Secondly, the UAE central has kept interest rates low to increase liquidity. Please see appendix 4. 5 and 4. 6 monetary policy and Interest rates since 2010. In the next few years, money supply will grow thanks to high oil prices, healthy domestic economic activity and international economy recovery. Central Bank of UAE will keep low interest rate and will wait for a cue from the US Federal Reserve before increasing interest rate. EIBOR will stay low and the loan to deposit ratio will be below 100%. We expect ample liquidity in the UAE’s banking sector.
To conclude we can say that, to avoid bank crisis and mortgage crisis, central bank of UAE creates new rules for banks in 2013. Central bank issues a ‘mortgage cap regulation’ and ‘monitoring large exposure limits regulations’ in order to have more control of the monetary policy. References Research, academic revues, websites http://www. uaeinteract. com/docs/Central_Bank_issues_regulations_remonitoring_large_exposure_limits/58318. htm https://www. cia. gov/library/publications/the-world-factbook/ http://almahmoudm. wordpress. com/2013/03/ http://www. imf. org/external/pubs/ft/scr/2012/cr12116. pdf http://www. uaeinteract.
com/docs/UAE_Central_Bank_issues_mortgage_cap_regulation/57988. htm http://www. diplomatie. gouv. fr/fr/dossiers-pays/emirats-arabes-unis/presentation-des-emirats-arabes/ http://www. tradingeconomics. com/united-arab-emirates/interest-rate Martin, Matthew & Meed, “ANALYSIS: Bank liquidity rises in UAE”, Middle East Economic Digest, 00477230, 6/14/2013, Vol. 57, Issue 24 Databases Some information mentioned in this report have been retrieved from Bloomberg 6. Appendices UAE Banking sector Appendix 1 UAE Commercial banks – Credit risk analysis 350,0 300,0 250,0 Amount of AED 200,0 150,0 100,0 50,0 0,0 AVERAGE EMIRATES NBD PJSC UNION
NATIONAL BANK/ABU DHAB FIRST GULF BANK Total Loans (in billions) 55,1 234,8 59,5 118,4 20,6 43,7 Customer Deposits (in billions) 53,9 213,9 63,4 119,3 20,7 47,5 Total Assets (in billions) 78,1 308,3 87,1 175,0 27,3 Total Debt (in billions) 8,6 43,8 4,3 21,5 0,2 NATIONAL COMMERCIAL MASHREQBA BANK OF RAS BANK OF NK AL-KHAI DUBAI NATIONAL BANK OF FUJAIRAH UNITED ARAB BANK NATIONAL BANK OF UMM AL QAIW BANK OF SHARJAH 29,4 13,0 11,0 7,1 13,3 28,1 12,4 10,1 7,3 16,5 76,4 39,5 17,5 15,0 12,2 22,8 8,6 2,6 1,8 2,4 0,7 0,9 UAE Commercial banks – Ratio analysis 120,0% 100,0% rate in % 80,0% 60,0% 40,0% 20,0% 0,0% AVERAGE EMIRATES NBD PJSC.
UNION NATIONAL BANK/ABU DHAB FIRST GULF BANK NATIONAL BANK OF RAS AL-KHAI MASHREQBA NK COMMERCIAL BANK OF DUBAI NATIONAL BANK OF FUJAIRAH UNITED ARAB BANK NATIONAL BANK OF UMM AL QAIW BANK OF SHARJAH Total Loan to Total Deposit 99,1% 109,7% 93,8% 99,2% 99,5% 92,2% 104,7% 104,4% 109,4% 96,9% 80,7% Total Loans to Total Assets 68,3% 76,1% 68,3% 67,6% 75,6% 57,3% 74,4% 74,0% 73,6% 57,6% 58,2% Debt/Assets 8,1% 14,2% 5,0% 12,3% 0,9% 11,3% 6,7% 10,1% 16,1% 0,0% 4,1% Debt/Capital Ratio 30% 55% 23% 42% 4% 38% 28% 44% 52% 0% 18% Efficiency Ratio 33,5% 36,7% 24,9% 19,7% 44,3% 45,4% 30,9% 36,9% 30,5% 34,2% 31,2% Capital adequacy ratio.
22,5% 20,6% 23,2% 21,3% 24,3% 19,3% 23,2% 19,2% 18,9% 31,8% 23,0% Appendix 2 Indicators (Expressed in billion of AED) M0 1980 1990 2. 4 4. 9 M1 7. 4 M2 23. 6 M3 Total bank lending Foreign assets (All UAE banks) Total assets (All UAE banks) 2000 2010 12. 2 47. 8 10. 8 34. 1 233. 0 58. 1 141. 5 786. 4 33. 0 73. 2 184. 0 985. 2 21. 2 43. 4 155. 2 972. 1 28. 5 62. 9 91. 5 233. 5 30. 9 129. 7 277. 1 1609. 3 Objectives of UAE Central Bank Economic Growth: 20 18 16 14 12 10 8 6 4 2 0 Real GDP (% change) Real exports of goods and services(% change) Real imports of goods and services (% change) Inflation: 3,5 3 2,5 2 1,5 1 0,5 0.
2010 2011 2012 2013 2014 2015 Consumer Price Index (% change) 2016 2017 Central Bank Instruments Appendix 4. 1 Financial Medium-Term Outlook – IHS Global Insight Country Intelligence Report UAE Appendix 4. 2 Short term Interest rates: – IHS Global Insight Country Intelligence Report UAE Appendix 4. 3 Money Supply Evolution since 2002 M2 – Central bank of the UAE Appendix 4. 4 Money Supply Evolution since 2002 M2 – Central bank of the UAE Appendix 4. 5 Monetary policy since 2011 – IHS Global Insight Country Intelligence Report UAE Appendix 4. 6 Monetary policy since 2010 – IHS Global Insight Country Intelligence Report UAE.