UAE Central Bank, Money and Capital Market
This paper explores the financial market and banking system in the United Arab Emirates. Over the period since formal creation of the United Arab Emirates on December 2, 1971, the country has witnessed dramatic changes. The UAE has not been marked just as the biggest living out effective practice in federation in the Arab world. It has reached one of the fastest and most amazing paces of economic in the history of the region (Abed & Hellyer, 2001). The country has huge reserves of oil, two the biggest and modern ports in Dubai and Abu Dhabi, developed touristic business, developed manufacturing, the most developed and most powerful health care center in the world, the most advanced education system, and clear law. The financial market and banking system play a significant role in the growth of the UAE. They are well-formed, act as a business partner, and maintain entrepreneurs. Thus, the paper discloses how they are built and how they work. It also shows the data about Central Bank of the UAE, its functions and monetary policy, money, and capital market of the UAE.
UAE Central Bank, Money and Capital Market
Functions of the UAE Central Bank
In 1973 the United Arab Emirates Currency Board was founded with the ability to emit the single currency AED. In 1980 the UAE Currency Board was transformed to the Central Bank of the UAE (CBUAE). It is the Central Bank of the country. One of its principal functions is to control all banks operating in the UAE (Hakim, 2005). Due to the Union Law No 10 (United Arab Emirates Official Gazette, 1980), the UAE Central Bank should “manage monetary, credit and banking policy and monitor their realization, accordingly to the overall policy of the state in such a way as to maintain the growth of the national economy and constancy of the currency”. To achieve these goals the Law authorizes the Central Bank to emit national currency; to maintain constancy of the currency within the country and abroad, to provide its easy convertibility into other currencies; to keep a credit policy so as to assist the balanced growing of the national economy; to organize and promote banking business and to control efficiency of the UAE banking system; to function as the government’s bank in limits established by the legislation; to consult the government in financial and monetary questions; to keep the country’s gold reserves and foreign currency reserves; to function as the main bank of the country; to present the financial interests of the state in the International Monetary Fund, the International Bank for Reconstruction and Development, and other international and Arab funds and institutions, and to carry out operation of the state with these organizations. From the moment of creation of the Central Bank, the banking segment has developed. As a result, the entire bank lending, foreign assets of all banks acting in the UAE, and all the assets of the Central Bank have strongly increased.
The monetary policy of the UAE Central Bank
The main goal of CBUAE’s monetary policy is to use a number of tools to achieve its monetary assignment, which is the fixed ratio of the Dirham to the US dollar. One of the considerable tools that CBUAE uses to achieve its main goal is the Dollar/Dirham exchange for Dirham liquidity.
Dollar/Dirham exchanges are a method of entering Dirham liquidity when a bank requires access to Dirham. Exchange arrangements bring about a contemporaneous selling and forward acquisition of Dollars against the acquisition/forward selling of equivalent Dirham quantity for a fixed term at specified precocious rates. The exchange ability was established at the request of domestic banks to cope temporary lacks of Dirham liquidity (Qualified Monetary Instruments, 2015).
The ability is available to all banks acting in the UAE under the jurisdiction of the Central Bank of the UAE.
The CBUAE also uses the minimal reserve demand tool. It concerns the reserves banks are asked to have at the Central Bank without the rate. Monetary policy can be operated by monitoring the level of these reserves, which in turn will influence the amount banks give in loans to the economy. Nowadays, the demanded reserves proportion is 14% of preservations and call accounts, and only 1% on time deposits. Besides, banks have to keep at the Central Bank 30% of their Dirham deposits abroad with non-resident banks (and also in their Head Office and filiations in the case of foreign banks). The proportions on the domestic client deposits apply evenly to Dirhams and other foreign currencies (Qualified Monetary Instruments, 2015).
Other monetary tools that the CBUAE exploits include: advances and overdraft ability for banks, which give loans and advances for up to 7 days without a pledge, and for up to 6 months, contrary to a pledge; reasonable regulation (capital adequacy ratio, loan-to-stable-resources ratio, personal loan limit, large exposure limits); Certificates of Deposits and Repo abilities on Certificates of Deposit (CDs) held; Liquidity Support Ability.
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The UAE money market
The money market is a system of economic relations regarding the provision of capital for up to a year. The money market reflects the supply and demand for money, as well as the modelling of the balanced ‘price’ of money. The money market members are on the one hand, men with money (lenders), and on the other hand, men borrowing the money under definite terms (borrowers). In the UAE, on the money market, banks (47 banks, e.g. Dubai Islamic Bank, Emirates National Bank, Federal Commercial Bank (Mallakh, 1981)), non-bank credit organizations, businesses and organizations of various types, such as legal entities, individuals, the state represented by the appropriate authorities and organizations, international financial institutions, and other financial and credit institutions act as lenders and borrowers. The money market tools in the UAE are various short-term securities, short-term loans (interbank and commercial), and redemption agreements (sale of securities under reverse redemption). In the UAE, the short-term securities can be bought and sold on the exchange and OTC markets. The OTC securities market consists of the agreements made between relatives, inheritance, bequests or donations, transactions made on the basis of a court decision, at public bidding, and other transactions. Stock market is the agreements made on the Stock Exchange. In the UAE, there are three key Stock Exchanges: Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM), and Nasdaq Dubai.
The characteristics of the UAE money market and of the UAE Central Bank’s liquidity control procedures have been formed by taut restrictions set by the fixed exchange rate order (Chailloux & Hakura, 2009). Big US dollar equilibration held by domestic banks, their comfortable accession to the dollar market, and credibility of the dirham to the dollar have always allowed the UAE banks to operate their liquidity globally and to consider dollar and dirham financing as commutable and easily accessible. With easily accessible US dollar liquidity, banks should not worry about picking up the money in home currency. This restricted the authorities’ intention to develop a more efficient money market in domestic currency (Chailloux & & Hakura, 2009). The dollar peg restricts the UAE money market. The continued condition of long liquidity in the system has helped to restrict money market actions to substantially short-term tenors, and also restricted the necessity of domestic banks to vary the possible funding sources and tools utilized in the interbank market. The deficit of variety in interbank funding tools and tenors has led to the vulnerability of the UAE banking system to a bout of liquidity tension, especially for banks not maintained by a foreign source. While foreign banks can utilize more diverse tools to finance their asset enlargement due to their franchise and fortification from their origin bank, domestic banks had to rely on the development of their deposit basis, and had to borrow overseas but with minor guarantee on the rollover possibilities in case of efforts, in contradistinction to subsidiaries of banks abroad. As a result of these restrictions, the UAE banks have turned into slowly stretched relative to their retail deposit basis with loans to deposit proportions of some banks acting in the country moving over 100% in 2008. Certainly, the chronology of liquidity squeeze, which started in 2008, assumes that tension on the worldwide US dollar market triggered the dirham liquidity tension, and there are doubts that the deficit of deepness of the dirham money market brought in to extend this tension, as domestic treasurers could not simply find domestic financing options nor could they base on adequate holdings of genuinely liquid assets. The UAE Central Bank has to create a provided level of spare money lack, which would increase its control of money market interest and general money market terms. This liquidity lack would not only make the market dependent on liquidity infusions but also have the reward of increasing the operation of money markets and develop commercial banks’ liquidity administration standards.
The UAE capital market
The capital market is part of the financial market with ‘long money’, such as assets with a matureness of more than a year. Money resources can be provided either as direct bank loans or in change for securities. The company can draw funds for the further growth only on the capital market.
The UAE is an important player on the international capital markets due to the investment institutions, such as the Investment Board of Abu Dhabi, Dubai Ports World, Dubai Holding, and the International Petroleum Investment Company of Abu Dhabi (IPIC). Since the founding of the state its income does not stop growing.
Share Capital Markets. The UAE’s distribution was refreshed from a border market to a forming market. As a result, the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM), and Nasdaq Dubai are expected to be consolidated into the MSCI’s forming markets index. Analysts have considered that this will draw more than $270 million into the stock exchange. The UAE stock exchange accomplishment in the past years is considerable, with the ADX completion of 2013 with $23 billion in share exchange value, announcing a substantive volume increase of 282% in comparison with 2012. Socio-political fuss in the big area is running commercial volumes with contributors searching for a safe harbor. This has a good effect on the real estate and stock valuables in the UAE. Furthermore, the index started at 2,631 and finished by 63% higher at 4,290. In 2013, the DFM was the second best carrying out exchange globally, and in January 2014 it reached a new five-year peak to 3,819 points restoring back to the January 2008 peak (Nehra, 2014).
Bourse Strengthening and Control. The UAE’s stock market controller, the Securities and Commodities Authority prolongs to ameliorate and carry out higher standards of control since its beginning while providing the investors’ trust, and also operating not to prevent capital market activity topically. Abu Dhabi and Dubai have ended due thoroughness on a possible association of the ADX and DFM, which will provide a more effective and domestic approach to the world depositor commune. Besides, there is a push from the UAE pointed companies to increase foreign possession limits on their shares. Under the UAE regulations, contributors from abroad are allowed to purchase up to 49% of their shares (Nehra, 2014). To draw future capital from the worldwide deposit commune with big fiscal organizations, there is a challenge to increase the limit of foreign possession on the UAE shares. The tendency to enlarge limits is notable, e.g. two main UAE pointed banks and a pointed real estate developer who have confirmed enlarged foreign possession limits from lower degrees to 20-25% of their share capital.
Debt Capital marked. Bond emission from the area is predicted to prosper because of essential infrastructure contribution and refunding. The UAE, which has the biggest portfolio of pending debt securities in the GCC, has emitted new regulations for lending and trading of covered bonds (that have a privileged claim on the assets in case of default). This is a desirable overture for the growth of the UAE’s arrears market, and will predict a new beginning of financing for commercial banks.
Islamic Financial Markets (Sukuks). Dubai is going to become the world center for Islamic finance with the purpose to adjust Islamic banking and Islamic capital market in the UAE. For the present, Emaar Properties has double transferred $500 million for sukuks emitted in 2011 on Nasdaq Dubai, ensuring future impulse to the Dubai’s intention to become the world center for sukuk. Moreover, the UAE based GEMS Education fitted transfer of $200 million sukuk on Nasdaq Dubai (Nehra, 2014).
Defining Period for the UAE Capital Markets. The following years are going to be a formatting time for the UAE capital markets with anticipation of growing regional and worldwide contribution into the UAE; increase in debt and shared security estimations; raised trading amounts and resumption to a more constant and prosperous IPO listing time. Certainly, contributors are now more convinced to unroll money on the side lines into the UAE markets with perspectives of reliable environment and long term refunds.
So, a few years ago, the UAE was an undeveloped country. Today, it has reached the profit level as in the industrialized countries (Abed & Hellyer, 2001). The financial system plays a significant role in the prosperity of the UAE. The UAE Central Bank is the main bank in the country and its main function is to supervise all banks operating in the UAE. The main goal of its monetary policy is to use a number of tools to achieve its monetary assignment, which is the fixed ratio of the Dirham to the US dollar. The UAE financial market is divided into the money and capital market. These markets are well-formed and, as a result, are among the developed markets of the world. But still, they are not the best, and there is much to be changed and where to grow.
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