Strengthening the System

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Looking to capitalise on early signs of a banking recovery emerging in the UAE, the Central Bank has turned its attention to improving corporate governance within commercial banks in a bid to further boost confidence in the sector.

Financial institutions in the country are in good health, according to a recent statement by a federal ministerial committee. "The UAE banking sector is stable and firmly on the growth path," the statement read.” The committee, which is in charge of steering the nation through the choppy seas of the global financial downturn, went on to say, "The liquidity status of UAE's national banks is excellent."

However, other industry experts are being a little more cautious. According to Marios Maratheftis, the head of research at Standard Chartered Bank, "The coming few months, especially the fourth quarter of this year, (given strong seasonal factors in the summer months) will confirm any improvement in liquidity."

And, there are signs emerging that lending is picking up. According to Standard Chartered Bank, personal loans in the UAE increased 2.9% month-to-month in May after a decrease of -0.5% in April. Meanwhile, the gap between loans and deposits for banks in the UAE fell from $31.6bn at the beginning of the year to $8.5bn in May. This is expected to make it easier for banks to loosen their purse strings and slowly resume lending.

Bankers in Abu Dhabi, and indeed the UAE in general, have faced numerous challenges since the ripples of the credit crunch were felt on these shores late last year. Loan requirements tightened, and lending – both interbank and bank-to-borrower – ground to a halt in the final quarter of 2008. In marked contrast to recent years, where banks enjoyed healthy profits, the issue of published results became secondary to the debate of how the Central Bank and the federal government were going to deal with the liquidity drought.

Policymakers came up with a raft of measures to shore up confidence. At the peak of the credit crunch headlines in September 2008, the government, in an effort to encourage inter-bank lending, made a facility amounting to $13.6bn available for banks operating in the UAE. Despite this, constraints continued to exist within the lending system.

The following month a $19bn liquidity support scheme was launched. The Central Bank also took other steps to stimulate lending, this time through a foreign currency swap. The facility, although complex, essentially involved the Central Bank buying US dollars against the dirham on the spot market and selling dollars against the dirham in a forward contract at the same rate.

A further boost was provided with a government undertaking to guarantee bank deposits for a period of three years. In February 2009 the government of Abu Dhabi announced that it would inject a further $4.4bn into local banks to increase liquidity.

Khalil MS Foulathi, the chairman of the Central Bank, told OBG, "UAE banks today are on a very strong footing. Looking at them from a capital base, they were very highly capitalised, and that was before the government's injection of tier 1 and tier 2 capital. Banks' ratios may now be touching 20% thanks to that capitalisation."

With liquidity under control and banks beginning to lend again, the Central Bank has now turned its attention to other measures, which are intended to further improve confidence in the system. It recently issued draft corporate governance guidelines to all commercial banks.

"Commercial banks are leading contributors to a successful UAE economy and are expected to show the way on high management standards and corporate governance," Sultan Al Suwaidi, the Central Bank governor, wrote in a report released on 17 June.

The guidelines stress the importance of improving disclosure standards and increasing transparency. By the same token, they will ask banks to have the necessary credit and risk committees in place in order to strike a balance between profit taking and curbing economic growth. 

According to the Central Bank, the new guidelines are based on international regulations but adapted to best serve the local characteristics of the UAE's banking sector.

Given that the expected results of these new guidelines are likely be greater transparency and increased disclosure, they should encourage investors to deploy their cash reserves in Abu Dhabi and the wider UAE in the future.

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