By Hassan Ali Mansoor
A noticeable trend around the world these days are media reports that paint a gloomy picture of the global economy. A particular focus of economists has been global banks and financial institutions. These reports claim that some banks have invested in risky portfolios that expose their customers to unnecessary risks. The precarious financial condition of Deutsche Bank, Germany, is quoted as an example of bad financial policies and decisions.
The focus has also turned to the Middle Eastern and GCC banks. Some economists are beginning to question local banks and financial institutions and starting to criticize them for failing to hedge against exposure and financial risk. It has been claimed that individual bad policies could ultimately lead to the snowballing of a larger crisis that will ultimately impact regional and global economies.
Although it is necessary to point out specific bad policies of some banks, focusing solely on banks is, however, missing the forest for the trees.
More than the banks and financial institutions per se, it is the banking system as a whole that provides the ‘ecosystem’ in which banks or financial institutions either flourish or flounder.
The U.A.E. banks and financial institutions have been able to thrive on the strong foundation provided by the U.A.E. Central Bank. The Central Bank manages the entire spectrum of banking system. It acts as the guardian of the entire financial ecosystem of the U.A.E. Besides regulating the banking sector, the Central Bank manages and ensures stability of the currency; manages the UAE’s credit policy; acts as the Government’s banker; provides monetary and financial support to the Government; and acts as the lender of last resort to banks operating in the UAE etc.
Over the years, this has provided the solidifying base on which the U.A.E. banking sector has been able to establish itself despite the regional economic slowdown that has impacted the global economies as a whole. The impetus provided by the U.A.E. banking sector is visible in the banking sector’s solid grounding and gradual growth over the years.
Recent media reports confirm that the U.A.E. banking sector remains “well capitalized, highly liquid, sound and stable”. By late 2018, the total banking assets of UAE banks had reached 780 billion USD which enabled the banking sector to be categorized as the largest in in the Arab world. Not only has capitalization remained within acceptable limits, the capital adequacy ratio has also hovered around 17.5 percent.
So what is it that has led to the U.A.E. banking sector’s robust growth and development? This has been accomplished through strong and robust policies, keeping an eye on the future, and keeping abreast of important initiatives in the banking sector. All this has enabled the U.A.E banking sector to not only establish positive growth but has positioned it to record further growth in the future.
The key initiatives that have provided the grounding for the sector’s growth include Emirates Digital Wallet Company, an initiative that has the participation of 16 major U.A.E. banks. Other important initiatives are the Taskaruk Platform which is intended to enable sharing and exchange of information on cyber threats as well as the Courts Banking Experts Accreditation which is an online system that is the result of a collaboration between the Ministry of Justice and the Central Bank. Other positive developments are the Ethical Selling Framework and the Customer Complaint Handling Framework.
Despite all the above initiatives, the U.A.E. banking sector is at the cusp of developments. Having capitalized its base, the next step in the transition the banking sector is consolidation.
The need for consolidation or merger of banks within the U.A.E. arises from cost synergies, diversification of the books in light of the recent global economic slowdown. Recent mergers of banks in the U.A.E. signify the increasing trend to ‘consolidate on gains’ and spread the portfolio through consolidation / merger of banks. As is the case in other economies, the smaller banks are unable to compete with the bigger banks and need to leverage on their global outreach to thrive in the global economy. It therefore comes as no surprise that there is news of ongoing discussions on mergers between banks with a view to ‘survive’ and ‘thrive’. That this trend is now increasingly visible in the banking sector indicates that U.A.E. banks are mindful of the need to better synergize in a highly competitive global market. Not only would the banks benefit from combining their ‘strengths’, but also consumers would benefit from better experiences.
The UAE banking system has remained steadfast and strong despite the challenges faced by other global economies. The growth has resulted from the sound regulatory overview by the Central Bank. The Central Bank has also led the way in terms of introducing best practices and policies that have provided the ecosystem in which the banking sector has been able to grow and prosper despite a challenging global economy.
The author is a senior professional with 15 years of experience in the banking industry. Email: [email protected]
Also published on Medium.