UAE banking system stable and resilient: Central Bank

The UAE banking system concluded the year 2019 in a resilient position with adequate capital and liquidity buffers well above regulatory requirements. The banking system remained profitable due to the effectiveness and improved cost efficiency benefitting from efficiency gains related to recent mergers in the sector, according to the UAE Central Bank report.

The Central Bank of the UAE (CBUAE), has published its Financial Stability Report (FSR), which provides information, analysis and an assessment of the resilience and matters that require additional support in the banking and financial system in the UAE promoting public understanding and transparency.

The report covers macro-financial conditions, regulatory developments, assessments of the banking and finance sector, as well as assessments of payment systems, capital markets and the insurance sector.

During the first quarter of 2020, the outbreak of the COVID-19 pandemic changed the outlook for global and domestic economic activity, posing challenges to the operating environment of the banking sector. “However, our stress tests demonstrate that the UAE banking sector is able to withstand macro-financial shocks of any size,” the bank said in a statement.

The government of the UAE and CBUAE have taken a wide range of measures to mitigate the adverse impact of COVID-19 pandemic and launched substantial financial programmes to help affected individuals and corporates and the economy at large.

In addition, the temporary measures introduced by the CBUAE included the IFRS 9 (International Financial Reporting Standard), guidance and prudential filters that were designed to ensure financial and prudential reporting of financial institutions adequately, reflect the COVID-19 operating environment.

“Based on the most recent data, the aggregate lending and deposit growth remain stable and the banking sector in the country holds good level of liquidity and capital. The Capital Adequacy Ratio was 16.9 per cent as of end March 2020 and the Eligible Liquid Asset Ratio was 16.6 per cent as of end May 2020, well in excess of the minimum regulatory requirements,” according to CBUAE.

Abdulhamid Saeed, Governor of the Central Bank of the UAE, said, “The Financial Stability Report demonstrates a robust and resilient banking system in the UAE. The banking system proved its ability to face the consequences of COVID-19 pandemic and perform its role in supporting the economy, further reinforced by the CBUAE’s proactive Targeted Economic Support Scheme reaching Dhs256 billion since its launch, but we shall remain vigilant and take the necessary and appropriate measures to further support the UAE’s economic growth.”

The Central Bank of the UAE announced recently that it will introduce a new deposit facility named Overnight Deposit Facility (ODF), which will enable conventional banks operating in the UAE to deposit their surplus liquidity at CBUAE on an overnight basis. The facility will effective from 12th July, 2020.  “The introduction of the ODF is the first step towards implementation of the new Dirham Monetary Framework announced earlier this year,” the UAE Central Bank said in a statement.

 It added, “The new deposit facility shall be the prime facility for managing surplus liquidity in the UAE banking sector prior to the launch of the Monetary Bills Programme and shall replace issuance of one-week Certificate of Deposits.

“With the introduction of ODF, the general stance of the CBUAE’s monetary policy will be signaled through the interest rate of the ODF, which becomes the main policy rate of the CBUAE and will be referred to as the Base Rate. Accordingly, the CBUAE expects that overnight money market rates should hover around the Base Rate under normal markets conditions. “The Base Rate, which will be anchored to the US Federal Reserve’s Interest on Excess Reserves, should also provide the effective interest rate floor for overnight money market rates.”

The CBUAE said it will also be providing a variant facility of the ODF to cater for licensed financial institutions that carry on all or part of their activities and business in accordance with the provisions of Shariah rules.

 “Until this facility becomes operational, the CBUAE will continue to offer to these institutions the one-week commodity Murabaha-based Islamic Certificate of Deposits, which will be breakable on daily basis,” CBUAE explained.

Commenting on the launch of the ODF, Abdulhamid Saeed, Governor of CBUAE, said, “The introduction of this new facility is a reflection of the CBUAE’s continuous efforts to achieve the objectives of its monetary policy and to foster money market developments in the UAE. This new facility will support banks operating in the UAE in proactively managing their day-to-day liquidity and help in aligning overnight money market rates with the Base Rate in normal market conditions.”

WAM