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February 01, 2019

IMF published its staff report under the 2018 Article IV consultation with the United Arab Emirates (UAE). The report highlights robustness of the banking system and notes that bank profitability, liquidity, and capital buffers remain strong, despite an uptick in the non-performing loans (NPLs). The central bank and banking law was approved in October 2018, envisaging increasing the central bank of the UAE's (CBU) capital, enhancing central bank independence, improving the prudential framework, and strengthening the ability of supervisors to take action, if necessary.

The capital adequacy ratio has remained above 18% in the second quarter of 2018. Bank liquidity has improved further with increased oil prices. With the economy recovering only gradually, NPLs rose, reaching 7% of total loans in the second quarter of 2018 (from 6.4% at the end of 2017). While small and medium enterprises (SMEs) and households led the NPL increases in 2017, the latest increase was mostly driven by government-related entities (GREs) and other large corporates. Despite the increase, NPLs remain fully provisioned. Transition to IFRS 9 has also prompted banks to increase provisioning, although it has not had an apparent impact on NPLs. Increased risks warrant heightened supervisory vigilance. Commencing issuance of domestic debt securities and strengthening the central bank’s liquidity management framework will promote financial market stability and development. The IMF staff recommends that ongoing initiatives to upgrade the regulatory framework should continue. Conducting stringent stress tests and following up with banks on their results would help maintain financial sector stability. 

The staff welcomed the progress of CBU in modernizing the regulatory framework in 2018. The medium-term reform agenda is built around five pillars: risk management, Basel III, controls/compliance, resolution, and market development, along with an overarching corporate governance framework. The pillar on risk management was completed in 2018, with the issuance of a new risk management framework for banks. It comprises five regulations covering overall risk management, operational risk, market risk, interest rate risk, and country and transfer risk. New regulatory standards supporting the Basel 2017 capital regulation (leverage ratio, CCR, OTC, and CVA) was expected to be published in 2018. This will complete the work on the Basel III pillar in line with international set timeframes (Basel III liquidity regulations were issued in 2015). All banks in UAE currently comply with the Basel III regulatory requirements and CBU expects that they will also comply with the new regulatory standards. 

The pillar on controls and compliance was largely completed in 2018. Regulations on internal controls, compliance, and internal audit, which give significant responsibility to the heads of compliance and internal audit, as well as financial reporting and external audit, which require transparent financial reporting and high quality external audits in banks, were issued in 2018. This pillar will be fully completed in 2019, with the issuance of two further regulations for banks on major acquisitions and significant ownership transfer. In 2019, CBU plans to commence regulatory development work on the resolution pillar, which will cover recovery and resolution planning. Work will also progress in the consumer protection area and on a new regulatory framework on Islamic finance in the UAE. Beyond bank finance, fostering the development of domestic capital markets and a coordinated approach between on-shore and off-shore regulators in the fintech area would broaden SME sources of capital, while mitigating financial risks.

Under the market development pillar, CBU issued in 2018 a regulation for nonbank financial institutions, which sets out the new regulatory framework for finance companies operating in the UAE, including requirements for a specific business model, governance, risk management and controls/compliance. A regulation on crowd-funding is nearly completed and a strategy aimed to support the financing of the UAE’s micro, small and medium-size (SME) business (including regulations) in coordination with other UAE authorities was further developed in 2018. In 2019, CBU plans to commence further work on regulations related to payments and fintech. The new corporate governance framework for banks operating in UAE was expected to be issued by the end of 2018. The framework introduces sector-wide polices in line with international best practices, such as the inclusion of independent directors in banks’ boards and mandatory committees, the reinforcement of the fit-and-proper process for members of boards and senior management, and the introduction of minimum disclosure requirements in banks’ annual governance reports.


Related Link: Staff Report

Keywords: Middle East and Africa, UAE, Banking, Securities, Article IV, Basel III, IFRS 9, Liquidity Risk, Recovery and Resolution Framework, IMF

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