Banking Regulations in UAE (Thesis Sample)

Name: Course: Instructor: Date: Banking Regulations in UAE Introduction The United Arab Emirates has been a sensation in the recent past, with astronomical economic growth, abundant natural resources, and ambitious projects to diversify the economy. It has generated plenty of interest for investors, rising to rank highest among the real estate investment destinations before the financial crisis of 2008 and quickly recovering from the same to resume the same iconic status CITATION NBA15 \l 1033 (NBAD, 2015). Owing to the abundance of financial activity in the region, the banking sector has emerged strongly. It is one of the escape destinations towards which people moved their investment despite the effect of a bursting real estate bubble in the 2008 crisis CITATION Anu12 \l 1033 (Mehta, 2012). This paper takes a particular interest in the regulation of the banking sector in the UAE and its effects before and after the financial crisis. The UAE had forty-nine banks, twenty-three of which were local, and twenty-six were foreign. Together, all the banks had 957 branches between them throughout the emirates. Most of the banks are owned either by the sate, or by ruling royal families CITATION NBA15 \l 1033 (NBAD, 2015). They are all regulated by the Central Bank of the UAE. This paper aims to show that the statement "the hierarchical financial system as used in Abu Dhabi is effective and worthy of emulation" is true. Pantos argued in his 2016 article in the Journal of International Banking Law and Regulation that the Canadian financial system is not hierarchical and the keiretsu structure is inexistent in Canada CITATION The16 \l 1033 (Pantos, The Canadian Horizontal Keiretsu: Veracity or Fallacy?, 2016). This paper discusses the regulatory and supervisory structure of the UAE banking sector and its effectiveness, eventually showing that it is hierarchical yet effective and therefore Buckley's analysis on "relationship-lending" is not entirely wrong. Review of Literature Regulatory Framework The government in the United Arab Emirates (UAE) exercises strict control over the banking sector. The control is not directly exercised but indirectly through the Central Bank of the State. This has been the case since 1980 when the first of the three primary laws that govern the banking sector in the country was promulgated. The three laws include the UAE Federal Law No. 10, otherwise known as the Banking Law, the UAE Federal Law No. 18 (the Commercial Code) of 1993, and the UAE Federal Law No. 6 (Islamic Banking Law) of 1985 CITATION Bas11 \l 1033 (Ahmed, 2011). In addition to these pivotal laws, there are notices, resolutions, and circulars as the UAE Central Bank's board of governors has passed them since its establishment. The Banking Law is the backbone of banking regulation in the UAE. It establishes the UAE Central Bank and details the bank's roles in its provisions. In its regulatory capacity as mandated by the Banking Law, the UAE Central Bank is responsible for issuing the nation's currency, the Dirham. It performs the task of directing the credit policy in the nation as well as the organization, promotion and supervision of the entire banking industry. Additionally, the UAE Central bank is the chief advisor to the government on monetary and other financial issues. It is also the UAE government's and other banks' bank CITATION Bas11 \l 1033 (Ahmed, 2011). The bank is aided in its role as the regulator of the currency by its role maintaining reserves of gold and foreign reserves. In addition to specifying the main roles of the central bank, the Banking Law details the right procedure for registering, licensing and operating financial institutions such as commercial and investment banks, financial and monetary intermediaries as well as representation offices. However, there are institutions that are exempt from the jurisdiction of the Banking Law. They include public credit issuing institutions set up by legislation, private pension funds and savings, insurance and reinsurance institutions as well as governmental agencies or institutions for investment and development funds CITATION Bas11 \l 1033 (Ahmed, 2011). The Commercial Code is the base upon which commercial banks are established. In it are detailed provisions that specify banking operations procedures. The procedures specify pertinent issues such as bank deposits, accounts, documentary credits, checks, promissory notes among others. The Islamic Banking Law was necessitated by the advent of Islamic Banking CITATION Bas11 \l 1033 (Ahmed, 2011). The UAE is an Islamic nation and since its inception, Islamic banking was bound to be a success in the nation. Given their separate mode of operation from conventional banking, the Islamic Banks are exempt from some of the provisions of the Banking Law. The Islamic Law was therefore developed to seal any loophole that might have emerged from these exemptions CITATION Bas11 \l 1033 (Ahmed, 2011). The additional regulatory resolutions, notices and circulars from the UAE Central Bank's Board of Governors have addressed important issues in the evolving banking industry landscape. For instance, they address the maintenance of given reserve ratios, capital adequacy and reporting requirements. The regulation of the finance industry in the UAE is effective as witnessed by the resilience of the general economy in times of crisis. During the 2008 financial crisis, the UAE economy remained relatively stable, while institutions in more economically endowed jurisdictions crumbled. This has been attributed the supportive nature of the financial, and by extension banking sector regulator, the central bank. The UAE also has a supportive government, which also owns a majority of the major banks in UAE. In addition to support, the government and the public of the United Arab Emirates were largely in a position of financial strength throughout the crisis, as the hydrocarbon revenues remained high CITATION NBA15 \l 1033 (NBAD, 2015). One of the biggest challenges in the regulation of the banking industry in the UAE is that the entire regulatory framework is based upon legislation that was instituted in 1980. Since then, the mode of operation and indeed business has changed radically. This means that a law that is largely out of touch with the financial reality governs the entire banking sector in the state. The Banking Law lacks in sophistication in a world that is more sophisticated than ever before. This point was noted with concern in the early years on the second millennium and changes to the law were proposed. Surprisingly, the proposed changes were never promulgated CITATION Bas11 \l 1033 (Ahmed, 2011). They have therefore not had the effect that was expected of them in the industry as their time of conception. Changes during the 2008 Financial Crisis The UAE government, Central Bank, and the government in the Abu Dhabi Emirate moved to institute some changes during the 2008 financial crisis despite the robust state of the economy. Notably, the changes instituted in the Gulf state were largely preventive and not remedial as was witnessed in most western nations. Nonetheless, this was one of the pivotal times that changes were put in place in a largely inflexible framework. It is therefore worth the while to examine some of the changes instituted in this period and their impact, as have many studies since the crisis. The Central Bank of the UAE put in place schemes that allowed banks in the UAE to seek finding as and when they needed it. The funding was availed to banks inside the country regardless of their ownership. The banks, however, could only receive the funding subject to various conditions. They were supposed to use the funds borrowed only to service commitments that were existent prior to the emergence of the crisis. The banks were also instructed to minimize lending funds to non-resident foreign nationals as much as they could. Additionally, the banks had to liquidate all short term assets that they held in the money market to minimize their obligation to the central bank CITATION Bas11 \l 1033 (Ahmed, 2011). On top of that, the central bank required the banks to invest all the resultant surplus funds in the certificates of deposits it issued. The UAE central bank availed fifty billion Dirham in a facility to support short-term liquidity while the finance ministry put fifty billion into the banking industry in the form of medium to long-term deposits. The UAE federal government availed 120 billion Dirhams for the banking sector across all the seven emirates. The federal government demonstrated further support and confidence in its jurisdiction's finance sector by pledging to guarantee all the deposits in UAE banks and foreign banks that ran significant operations in the state. The guarantee would run for three years. The Emirate of Abu Dhabi's government also injected sixteen billion Dirhams into five banks based therein. In the year 2009, the Central Bank of UAE released guidelines that would lead into the state into the Basel II Capita Accord, a risk based capital model for the financial sector CITATION Wor02 \l 1033 (World Bank, 2002). This paper discusses the details of this model below. Supervision One of the roles that were assigned to the UAE Central Bank by the Banking Law is supervision of banks in the estate. The only exception is in the Dubai International Financial Center. Here, regulation is the mandate of the Dubai Financial Services Authority. The Central Bnak exercises this supervision via the reporting it requires of the banks. Banks must file various reports with the central bank periodically CITATION Wor02 \l 1033 (World Bank, 2002). The Banking Law also entitles the Central Bank to inspection of accounts, records, and books of any bank at its own discretion. These audits are normally conducted annually to an extensive degree. ...