Busy Year for the Central Bank of the UAE To achieve its mission of maintaining a “sound banking sector” in the United Arab Emirates, the Central Bank of the UAE (Central Bank) has been busy this year improving the regulations dealing with the banks and the banking system. Following the credit crunch, the Central Bank has looked at practices in other banking markets and at international standards.
As the UAE has a client base of businesses and individuals from all over the world, the Central Bank can consider international practices to make its own rules for the banking market in the UAE. This year, the Central Bank has concentrated on (i) bank regulation, (ii) retail banking and (iii) international aspects.
Classification of Loans
The Central Bank issued Circular 28/2010 “Regulations for Classification of Loans and their Provisions” (Regulations) to all banks, finance companies and investment companies in November last year. The Regulations set out new ways to categorise all loans similar to international standards.
The aim of the Regulations is to provide a “truly realistic financial position of banks and other financial institutions” in the UAE by using a method to evaluate loans using standards promoted by the Basel Committee and international best practice.
The Banking Supervision and Examination Department issued the Clarification and Guidelines Manual for the Regulations to assist financial institutions to classify the loans. Banks must make the monthly returns to the Central Bank on their loan provisions, economic activity and overdue or rescheduled loans. Banks must classify loans in the following way:
Normal loans normal banking risk for repayment as agreed 0%
Watch-list loans some weakness in financial condition 0%
Sub-standard loans some loss due to adverse factors to hinder repayment or weakness of security 25%
Doubtful loans full recovery doubtful, financial position not sound 50%
Loss loans exhausted all courses of action, may recover nothing 100%
UAE banks will also have to make an accounting provision for personal loans which are in arrears of 90, 120 and 180 days, of at least 25%, 50% and 100% of the loan, respectively. This applies to personal loans, car loans, credit cards and residential mortgages. Where collateral is given to the bank for particular loans and the net value exceeds the loan amount, then no provision is needed.
However, the Regulations set out the collateral required, the amount of provision that applies and the conditions for review and valuation.
The banks can change the category of a loan if there has been a default which the borrower has remedied. However, the borrower must provide evidence that the prospects are good for timely and full repayment as agreed. The loan will be put on the watch-list for 12 months and will be reviewed every month, during which time the bank can downgrade the loan if necessary to comply with the Regulations.
Clearly, it is prudent to require financial institutions to monitor their lending, the collateral they are holding and the provisions for their loans. Banks inevitably have to be in touch with their borrowers more regularly, which will give them an opportunity to spot any change in a borrower’s financial condition early.
In May 2011, the Central Bank issued a notice to all national banks requiring each bank to obtain the written approval of the Central Bank for nominations to its board of directors. While some may say this is too strict, the intention behind the notice is proper supervision of banks to consolidate stability in the banking system for the protection of depositors and shareholders alike.
The notice states that nominees should have “appropriate academic qualifications, adequate business and banking experience and a sound character to take decisions which protect the interests of concerned parties in a fair, transparent and appropriate manner”. In deciding whether to approve the nominee for a bank board of directors, the Central Bank will liaise with the Banking Supervision and Examination Department and the Anti-Money Laundering and Suspicious Cases Unit.
In March 2011, the Central Bank prohibited cold calling to individuals, preventing banks and finance companies from contacting people by phone uninvited to offer loans and services. While there was a mixed reaction to this in press reports at the time, it is clearly a protective measure by the Central Bank in its role as regulator to protect unsuspecting individuals from telesales.
Press reports looked at the possibility of job losses as some banks have their own telemarketing departments. This new ruling banning cold calling should help to bolster the reputation of banks in the UAE. The circular is not available to the public, so there could be different interpretations on what amounts to cold calling and what consequences will arise for a bank or an individual employee for a breach of the rules.
The Central Bank issued a circular on liquidity risk management and governance to banks in the UAE at the end of May, with which banks must comply from September 2011. It is the responsibility of the board of directors to manage liquidity and to make sure the bank holds adequate funds for a 30-day stress period.
The aim of the new rules is to reduce severe loss of liquidity in the banking sector and keep the banking market stable for UAE businesses and residents. Reports say that banks will have to make a monthly return to the Central Bank on liquidity which, together with the monthly return on the loan categories, should give the regulator a more realistic financial picture of the banks in the UAE and an overall view of the banking market at that time.
In 2008, the Central Bank set up the Liquidity Support Facility for banks in the UAE following the credit crunch. A bank can only take a short-term weekly liquidity line from the Central Bank if the Central Bank is satisfied that the value of the securities the bank holds is high enough. The Central Bank’s circular on liquidity and the Liquidity Support Facility should be viewed as prudent financial management tools for a bank’s board of directors.
New data protection rules now govern the exchange of credit information in the UAE. Federal Law No 6 of 2010 on Credit Information was issued in December 2010. It regulates the request, collection, preservation, analysis, classification, use, handling and protection of credit information.
The Central Bank and all other banks in the UAE have to implement the rules for data they hold and put procedures in place to comply with the Credit Information Law. Penalties for breach of the law can be financial or imprisonment where a party reveals credit information or provides a credit report without authority or the proper approval.
Rules on data protection apply in other markets and are recognised internationally as important to a credible and reliable banking system.
Bank Loans and Other Services
The “Regulations Regarding Bank Loans & Services Offered to Individual Customers” (Personal Loan Regulations) 29/2011 came into force on 1 May 2011 aiming to “boost confidence“ and to “enhance credibility of the banking system” by making the relationship between the lender and the borrower more transparent.
The Central Bank’s new regime for loans to individuals from banks, finance companies and Islamic finance lenders regulates the cost and some of the characteristics of personal loans in the UAE banking market. The rules cover personal loans, car loans, overdrafts, credit cards and debit cards. The Personal Loan Regulations aim to protect consumers from excessive fees and encourage responsible borrowing.
There is a table of rates and fees, with guidelines for all lenders in the UAE, which covers all sorts of banking services, for example:
- a range of interest or profit rates on personal loans, car loans, overdrafts and credit cards;
- account opening and closure fees;
- account balance letters;
- cheque transactions, e.g. issuing a bank cheque;
- debit card transactions, e.g. replacing a stolen ATM card; and
- processing fees for personal and car loans.
Lenders can be subject to a fine if they do not comply with the Personal Loan Regulations. Shari’ah-compliant lenders must also comply with the new regulations, other than the provisions on the method of calculation of interest. However, these rules do not affect investment and merchant banks.
Here are some of the main points to remember:
- Personal loans are now limited to 20 times monthly salary or total monthly income of the borrower. The repayment profile must not exceed 48 months. Repayments paid by making a deduction from an individual’s salary must not exceed 50% of the customer’s gross salary and any regular income, reducing to 30% on retirement.
- Car loans must not exceed 80% of the value of the vehicle the borrower is buying and the repayment period must not exceed 60 months. The borrower should also grant security to the lender over the vehicle.
- If a customer needs an overdraft, he or she must apply in advance setting out the proposed repayment period and sources of payment. Only once a lender has approved it, can the customer draw on the overdraft.
- Credit cards can only be issued to an individual with an annual income of more than AED 60,000. The regulations set out the method to calculate interest and the monthly amount payable and require banks to declare the relevant interest rate for loans, overdraft balances and credit cards.
There have been a number of positive press reports recognising the regulations as a step towards transparency and a sound banking system.
Following the Personal Loan Regulations, the Central Bank announced this summer that it intends to issue similar regulations on mortgage lending by banks in the UAE. This will build on the financial regulation coming from the Central Bank to bolster the stability of the banking sector. The Central Bank has not published the draft rules yet.
By 1 January 2012, banks will have to replace all existing cheques with new safer cheques as the current style cheques will not be acceptable in the UAE. The Central Bank has been sympathetic to the requests for more time to make the changes from the 23 national banks and other foreign banks in the UAE and has extended the deadline until the beginning of next year. The new cheques will have watermark security and a thermochromic mark to help prevent fraud which should make it impossible to tamper with the signature. The new cheques should also make electronic clearance easier for the banks.
A press report on 12 September announced that the Central Bank can now ban an individual from having a bank account in the UAE for a year if he issues four cheques which are not honoured. We cannot verify this report as yet as the regulations containing it are not yet available, but we will be watching this development closely. This rule should act as a deterrent against bounced cheques.
International Advisory Council
In a prudent move, the Central Bank announced the appointment of the International Advisory Council (Council) late in 2010. The role of the Council is adviser to the board of the Central Bank on (i) financial and monetary issues, (ii) corporate governance, and (iii) the structure of the Central Bank. The Council’s advice should help the board make informed decisions for the UAE banking sector by considering international practices.
The appointment of the Council was recommended by a report commissioned by the Central Bank in the wake of the global financial crisis. Its recommendations should assist the board to follow international best practices. The members are academics and professionals with international experience and expertise in finance, economics and business. They are:
- Professor Robert Mundell, who won the Nobel Prize for economics for his groundbreaking work on the creation of the Euro;
- Dr David Dodge, an acclaimed economist who was the governor of the Central Bank of Canada;
- Dr Joseph Yam, executive vice-president of the China Society for Finance and Banking, who was instrumental in establishing the Hong Kong Monetary Authority; and
- Sir John Bond, who served at HSBC for 45 years and was appointed Chairman and Chief Executive of HSBC and who latterly chaired the Institute of International Finance for five years.
At the meeting with the Council in May 2011, the Governor, the Deputy Governor and the senior staff of the Central Bank discussed topics such as the UAE banking and monetary statistics, the EIBOR (Emirates Interbank Offered Rate), Basel II and III and the public debt market.
Basel II and Basel III
To comply with international practices, the Central Bank has been working on implementing the proposals in Basel III well ahead of schedule. It can be confident in the knowledge that although it introduced Basel II capital requirements as late as November 2009, it imposed much stricter rates on the banks. For UAE banks the Tier 1 capital and total capital requirements since June 2010 have been 8% and 12%, respectively, which are substantially higher than the 6% and 8% set by Basel III and expected to be in place by 2019.
However, the Central Bank is discussing Basel II and III with the International Advisory Council to produce its own rules for UAE banks. In some areas, UAE banks may already be complying with the levels of capital set out in Basel III.
In March, working with the Financial Stability Institute for the Bank of International Settlements and the GCC General Secretariat, the Central Bank provided training on Basel III to its staff, GCC monetary agencies and GCC Central Banks. The training covered capital, leverage ratio, systemic risks and capital buffers.
Work continues within the Central Bank’s Anti-Money Laundering and Suspicious Cases Unit to counter money laundering and to combat terrorist financing to give the UAE banking market more stability and credibility at home and internationally. In late 2010, the IMF and The World Bank prepared a report for the Central Bank on the UAE anti-money laundering regime, from which emerged a national action plan.
One of the newest rules aims to monitor suspicious cash movements in and out of the UAE. From September 2011, any inbound or outbound passenger must declare cash or financial instruments over AED 100,000. There is no ban on the amount that can be moved but passengers must make a declaration. The new rule is the result of collaboration between the National Anti-Money Laundering Committee of the Central Bank, the Federal Customs Authority and the Customs Departments of the UAE.
There has been a push by the Central Bank to increase co-ordination between countries and other national bodies to co-operate and share information and training to fight money laundering and terrorist financing. For example, this year the Central Bank signed a Memorandum of Understanding with the Dubai Police and with the Monetary Authority of the Maldives. All financial institutions in the UAE now have to report any suspicious money transactions immediately to the Anti-Money Laundering and Suspicious Cases Unit at the Central Bank.
The Central Bank in collaboration with Deloitte Islamic Finance Knowledge Centre, based in Bahrain, held training over four weeks on Islamic finance. The aim was to develop knowledge of “compliance in Islamic financial services, risk management and regulation”. The course was open to employees of the Central Bank as well as the Ministry of Justice and the Dubai Financial Services Authority. This event shows how the Central Bank is developing its internal training and working with other government institutions and academic bodies. By taking the time to devote to Islamic finance, which touches on many aspects of banking, it is showing the participants and, of course, the banking market, that it considers Islamic banking a serious component of the UAE banking market.
On the Right Track …?
So, is the Central Bank on the right track to achieve its mission to “maintain a sound banking sector, support the financial system and adopt an effective monetary policy which ensures economic growth, lower employment and low inflation”?
The Central Bank is pushing forward on bank regulation with the new regulations on loan classification and the plans for corporate governance, which are aimed at maintaining a sound banking sector. The arrangements now in place for liquidity risk management should be a useful tool for UAE banks and the Central Bank to monitor the financial markets and to support the financial system. But, of course, there will always be more to do and new rules on mortgage lending are in the pipeline.
The new regime on personal loans has been welcomed and should bring about competition on services banks can provide where there may not be much differential on pricing. Press reports this September suggest that the Central Bank may review the rules early in 2012 following feedback from banks and customers. It will be interesting to see whether the Central Bank makes any recommendations for business customers, or for small to medium-sized businesses, along these lines in the future.
On the international stage, the UAE wants to display a credible, stable banking system to attract investment and to encourage businesses to create jobs in the UAE and for established businesses to remain and expand. By (i) adopting good international practices, (ii) being seen to fight money laundering and terrorist financing, and (iii) introducing rules to provide a capital cushion for personal and business borrowers alike, the Central Bank will help to support the financial system and provide the stability and credibility that international investors and businesses will seek. Appointing the International Advisory Council with its leading economists illustrates that the Central Bank is serious about its mission and is looking long term. So, yes, it seems the Central Bank is on the right track and has been busy making bank regulation and international best practices a priority this year. There could still be more ahead as the Central Bank works hard to attain its goal.
Central Bank of the United Arab Emirates - Established by Law 10 of 1980
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"Professionalism – Practise sound governance"
Values of the UAE
Central Bank "Participation – Achieve excellence through team work"
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Source – www.centralbank.ae