Banking in UAE
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For anyone considering banking in the UAE, here’s all you need to know about them. Here you can find out how the industry came into existence decades earlier and it has been constantly evolving to cater to every financial need of UAE-based residents.
UAE’s banking industry before the Union
The UAE was born with a natural advantage of having an established banking sector. The history of banking in the GCC and Iran are closely linked to Imperial Bank, which is now part of HSBC.
In 1946, Frank Johnson opened Dubai’s first bank, the Imperial Bank, now part of HSBC. For the past 75 years, HSBC has played a significant role in the development of the UAE; from installing the first ATM in the UAE to supporting the construction of the Sarouj Falaji and to the dredging of Dubai Creek.
According to HSBC records, Johnson had an unassuming start to his banking career in the UK. Following a stint for the National Bank of New Zealand, he joined the Imperial Bank in 1921. On completion of two years’ training in London, he was packed off to Persia, now Iran. Along with 50 or so compatriots, he was expected to set up business for Imperial Bank.
It was in Kuwait the first formal bank in the Arabian Gulf was established. Johnson secured an agreement to establish the Imperial Bank’s first foothold in Arabia in 1942 and the Imperial Bank opened its first branch in Kuwait City.
As he was negotiating on the Bahrain opening, Johnson had turned his eye to Dubai and the Trucial States. Dubai was one of the seven small sheikhdoms on the Trucial Coast, which in 1971 would form the United Arab Emirates.
Johnson’s interest in the tiny Gulf state stemmed from a series of events dating back to the 1880s. At that time, the ruling nationalist Persian Government had turned their attention to the port of Lingah — the Gulf’s major trade hub, which had prospered under Arab leadership. The Persian authorities took a decision to exert control over Lingah, and in the process alienated much of the merchant community. While Lingah’s economy was so robust that a trickle of departing merchants was hardly noticeable at the time. Across the water, many traders were quietly relocating their businesses to the ports of Ras Al Khaimah and Sharjah.
In 1894, His Highness Sheikh Maktoum Bin Hasher Al Maktoum came to power in Dubai. Sheikh Maktoum understood the implications of the historical shift in Lingah. He filled his Majlis with merchants to advise him and then set out to make Dubai the most commercially attractive port along the Trucial Coast, abolishing most tariffs and reducing the few that remained.
By 1901, Dubai was receiving the majority of merchants relocating from Lingah, quickly establishing the sheikhdom as a trade centre.
As the Dubai Government had hoped, the arrival of the Imperial Bank would provide a boost for domestic employment in addition to providing Dubai with much needed banking services. Under Article Five of the agreement, the Imperial Bank was obliged to offer jobs to Dubai denizens, who would work under an expatriate manager.
On 14 October 1946, the Imperial Bank opened its doors for the first time in Dubai. This was the first bank in what would later become the United Arab Emirates.
In 1949, the Imperial Bank was renamed The British Bank of Iran and the Middle East. Then, in 1952, following withdrawal from Iran, the bank was renamed again to The British Bank of the Middle East (BBME). HSBC acquired The BBME in 1959 and used the name until 1999.
Standard Chartered set up its operations in 1958, with its first branch opening in Sharjah.
(For the early history of UAE’s banking industry, we have borrowed from the book ‘HSBC: 70 years in the United Arab Emirates’)
Birth of UAE’s national banks
The first UAE national bank, the National Bank of Dubai, now Emirates NBD was launched in 1963. The bank was formed by then Dubai’s ruler His Highness Sheikh Rashid bin Saeed Al Maktoum, NBD merged with Emirates Bank International (EBI) on March 6, 2007, to form Emirates NBD. On 16 October 2007, the shares of Emirates NBD were officially listed on the Dubai Financial Market (DFM).
The merger between EBI and NBD to create Emirates NBD, became a regional consolidation blueprint for the banking and finance sector as it combined the second and fourth largest banks in the UAE to form a banking champion capable of delivering enhanced value across Corporate, Retail, Islamic, Investment, and Private Banking, Global Markets & Treasury, Asset Management and Brokerage operations throughout the region.
As at September 30, 2020, total assets were Dh692 billion, (equivalent to approx. USD 188 billion). The acquisition of DenizBank in Turkey represents a significant milestone for Emirates NBD with the Group expanding its presence to 13 countries, servicing over 14 million customers. The bank is ranked among the top 20 in the Forbes’ list of the World’s Best Regarded Companies, securing a leading spot among global brands.
The National Bank of Abu Dhabi (NBAD), now First Abu Dhabi Bank (FAB) was founded in 1968 by a decree of the Late His Highness Sheikh Zayed Bin Sultan Al Nahyan, then the Ruler of Abu Dhabi.
Currently FAB is the largest bank in the UAE. It was formed following a merger between First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD). On July 3 2016, the two UAE banks announced that their boards of directors had voted unanimously on the recommendation to shareholders for the merger of the two entities. The transaction was approved by the respective shareholders on December 7, 2016.
FAB offers financial solutions, products and services through its Corporate and Investment Banking and Personal Banking franchises. Headquartered in Abu Dhabi in Khalifa Business Park, the bank has a presence in five continents: Asia Pacific (APAC), Europe, Americas, Middle East and Africa (EAMEA).
Currency Board and origin of Central Bank of UAE
The UAE dirham was introduced in circulation for the first time on 19 May 1973. The ‘Currency Board’ was established, as per Union Law No. (2) of 1973. The Currency Board issued the national currency that replaced the Bahraini Dinar and the Qatar and Dubai Riyal currencies that were in use at the time.
The ‘Currency Board’ was replaced by Law No. 10 of 1980 concerning the Central Bank, Monetary System and Organization of Banking. As the country’s economy grew, it became apparent to the authorities that the country needed a fully-fledged Central Bank that has a regulatory and supervisory role over the country’s fast growing financial eco-system that comprised of a number of foreign and local banks.
The CBUAE today is powerful financial regulator responsible for the organisation of the country’s monetary, credit and banking policy and maintaining currency reserves in gold and other currencies.
Image Credit: Babudas Augustine and Vijith Pulikkal
Financial services eco-system of the UAE
The UAE’s financial services eco-system has both onshore and offshore components with the onshore banking industry and financial services regulated by the central bank.
Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM) are two financial free zones in the country regulated by independent regulators. These offshore centers cater to global financial institutions offering variety of financial services ranging from investment banking, fund management, insurance, reinsurance, captive insurance, Islamic finance, fund management and more.
DIFC is home to an internationally recognised, independent regulator, Dubai Financial Services Authority (DFSA) and a proven judicial system, under the DIFC Courts with an English common law framework, as well as the region’s largest financial ecosystem of more than 25,600 professionals working across over 2,500 active registered companies – making up the largest and most diverse pool of industry talent in the region.
The Centre’s vision is to drive the future of finance. Today, it offers one of the region’s most comprehensive FinTech and venture capital environments, including cost-effective licensing solutions, fit-for-purpose regulation, innovative accelerator programmes, and funding for growth-stage start-ups.
Established in 2013 by Federal Decree, Abu Dhabi Global Market (ADGM) is an international financial centre and free zone located on Al Maryah Island, Abu Dhabi. The ADGM free zone and financial hub is an integral part of Abu Dhabi’s Economic Vision 2030 and operates under its own commercial and civil laws that ensure a business-friendly environment.
Abu Dhabi Global Market (ADGM) with its well-maintained business ecosystem became fully operational in October 2015. Recognised internationally for offering financial services and conveniences to businesses, the financial centre was designed to become a catalyst for growth and development for local as well as international corporations. The system at ADGM is designed to identify the needs of businesses and provide them with solutions through their practices and facilities.
With three independent authorities, this global financial centre in Abu Dhabi has incorporated the best international practices to benefit businesses that choose to be a part of ADGM, UAE. ADGM authorities include the Registration Authority (RA), Financial Service Regulatory Authority (FSRA) and ADGM courts. All three authorities work together to offer a state-of-the-art business environment that gives rise to several growth opportunities.
UAE’s onshore financial services eco-system
The UAE’s onshore banking ecosystem consists of UAE banks, GCC banks, foreign banks, finance companies, wholesale banks and money changers.
The UAE currently has 21 locally incorporated banks, 6 GCC banks and 21 foreign banks operating onshore in the country.
In addition to the above there are 11 wholesale banks, 86 representative offices of foreign banks, 22 finance companies and 97 money changers regulated and operating in the UAE.
Types of banks operating in the UAE
Majority of banks operating onshore in the UAE are commercial banks. The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like fixed deposits and savings accounts to individuals and small businesses.
A universal bank is a bank that combines the three main services of banking under one roof. The three services are wholesale banking, retail banking, and investment banking. In other words, it is a retail bank, a wholesale bank, and also an investment bank. In the UAE, large commercial banks follow, at least to a limited extent, universal banking model. The concept of universal banking has blurred the strict classification of banks by their functions.
Wholesale banking refers to banking services sold to large clients, such as other banks, other financial institutions, government agencies, large corporations, and real estate developers. Wholesale banking services include currency conversion, working capital financing, large trade transactions, mergers and acquisitions, consultancy, and underwriting, among other services. Many commercial banks in the UAE offer wholesale banking services along with large international investment banks. In addition to the local and foreign commercial banks operating in the country there are 11 specialised wholesale banks registered with the Central Bank of UAE.
Image Credit: Babudas Augustine and Vijith Pulikkal
Retail banking, also known as consumer banking or personal banking, is banking that provides financial services to consumers as individuals not businesses. Retail banking is a way for individual consumers to manage their money, have access to credit, and deposit their money in a secure manner. Services offered by retail banks include checking and savings accounts, mortgages, personal loans, credit cards, and certificates of deposit (CDs). With most banks in the UAE dabbling in corporate lending and other services that comes under the universal banking model, no bank can be strictly classified as a retail bank. However, retail banking is a lucrative and substantial business for most local UAE banks.
Investment banking is a specific division of banking related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors. Investment banks also provide guidance to issuers regarding the issue and placement of stock and debt instruments.
Globally, many large investment banking systems are affiliated with or subsidiaries of larger banking institutions, and many have become household names, the largest being Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, and Deutsche Bank.
Broadly speaking, investment banks assist in large, complicated financial transactions. They may provide advice on how much a company is worth and how best to structure a deal if the investment banker’s client is considering an acquisition, merger, or sale. It may also include the issuing of securities as a means of raising money for the client groups and creating the documentation for the regulators, necessary for a company to go public. In the UAE, many local and international banks have limited to extensive investment banking operations.
How do banks make money?
A commercial bank is where most people do their banking. Commercial banks make money by providing loans and earning interest from loan products such as mortgages, auto loans, business loans, credit cards and personal loans. Customer deposits provide banks with the necessary funding to make these loans. These days, bond issues too are used to raise capital.
In addition to interest income, banks also make money through non-interest income such as fees, commissions and service charges. These fees vary based on the products, ranging from account fees such as monthly account maintenance charges, minimum balance fees, overdraft fees, non-sufficient funds (NSF) charges, safe deposit box fees, and late fees. Many loan products also contain processing fees in addition to interest charges.
In the simplest of banking operations, banks accept deposits at lower rates and lends at higher rates, making a margin that constitutes the bulk of the banks’ profits.
Evolution: M&A technology adoption see decline in number of banks
Mergers, consolidation and digital transformation in the UAE’s banking sector have seen some reduction on total number of bank branches and bank employees according to the Central Bank.
In 2019 licensed commercial banks decreased by one, due to a merger between Abu Dhabi Commercial Bank and Union National Bank.
Currently there are 21 national banks and 27 foreign banks (including GCC banks), and 11 wholesale banks operating in the UAE.
The branches of these locally incorporated banks decreased to 559 branches at the end of September 2020 from 664 at close of the third quarter of 2019. The number of electronic banking service units of these banks decreased to 32 units at the end of the third quarter of 2020.
The number of GCC banks remains steady during the third quarter of 2020 at 6 banks, with 5 branches. The number of other foreign banks and their branches also continued unchanged at 21 banks and 73 branches, respectively.
Lenders in the GCC have been rapidly consolidating as they seek to remain competitive. In 2019, most GCC countries experienced mergers, or talks to merge, both in the conventional and Islamic banking sector thus creating larger, stronger and more resilient financial institutions.
The technological and structural changes in the UAE financial sector has resulted in increased accessibility of mobile banking applications, online banking and ease in the use of automated teller machines (ATM) for the past several years. These improvements continue to pay off by enhancing smooth operations of the banking system.
In response to rapid technological changes and evolving customer requirements, banks are redefining how business is executed. “We are witnessing banks completely transforming and venturing into new age banking, be it through the use of Artificial Intelligence (AI) or going branchless to serve the customer base. We expect banks to aggressively pursue technological advancement and use revamped business platforms, partnering with various fintech firms,” KPMG said in a recent report.
Resilient outlook in challenging times
The challenging operating environment caused by twin shocks of slowing economic growth due to COVID-19 and decline in oil prices have seen sharp decline in profitability of UAE banks during the current year.
Moderating loan growth and the overall low interest environment has seen the interest income decline. Profitability of top UAE banks declined in the third quarter of 2020 due to the low interest rate environment and flat loan growth. The Top 10 banks’ total interest income declined for a third consecutive quarter – by 7.7 per cent quarter-on-quarter – according to the consultancy Alvarez & Marsal.
The challenging economic environment impacted credit uptake as loans and advances remained flat in Q3 2020 compared to Q2 2020. On the other hand, deposits increased 4.2 per cent QoQ, largely on the back of 16 per cent increase in FAB’s deposits. Consequently, loans to deposit ratio (LDR) decreased to 84.1 per cent compared to 87.7 per cent in Q2 2020.
Bankers, analysts and rating agencies expect asset quality of UAE banks to deteriorate in 2021 as payment holidays supported by the central bank expire and not all borrowers are able to weather the downturn. This is particularly true in real estate, contracting, retail, aviation and hospitality sectors.
Analysts expect a spike in Stage 3 loans under the IFRS 9 reporting classification. Stage 3 loans could rise to 6.5 per cent of gross loans by end-2021 from 4.9 per cent at end-2019, which would be well above levels reached during the last oil price shock in 2014-2016. Analysts say rise in loan restructuring and extension of support measures until end-H1-21 masks the true increase in Stage 3 loans.
Despite a significant increase in pressure on profitability and loan quality, UAE banks have been resilient to the COVID-related turmoil.
Funding and liquidity are expected to remain strong. Deposits have proved behaviorally stable, although contractually short-term. The CBUAE data show total money supply M3 (M2 plus government deposits at banks and at the central bank) rose 3 per cent quarter-on-quarter during the third quarter. On an annual basis, there was a 7.5 per cent growth in money supply to Dh1.805 trillion at the end of September.
Typically, M2 is considered the best indicator for the availability of liquidity in the economy, as it comprises currency in circulation outside banks, in addition to various deposits of all the resident sectors in dirham, except for those of the government.
At the end of the third quarter, there was a quarter-on-quarter increase in M2, mainly driven by a 0.5 per cent quarterly increase in non-government resident deposits at Dh1.37 trillion.
Bank assets, loans
Total assets of banks operating in the UAE increased by 2 per cent quarter-on-quarter, reaching Dh3.25 trillion. During the period between September 2019 and September 2020, total assets of banks were higher by 7.6 per cent. Gross credit in the third quarter increased by 0.8 per cent, reaching 1.8 trillion at the end of September 2020.
Total deposits of resident and non-resident customers with banks operating in the UAE rose 2.2 per cent quarter-on-quarter reaching Dh1.9 trillion. Resident deposits increased 3 per cent, reaching Dh1.71 trillion, while non-resident deposits fell by 4.5 per cent to Dh191.3 billion by the end of September.
Capital and reserves
Aggregate capital and reserves increased by 1.9 per cent (q-o-q), reaching Dh389.8 billion at the end of the third quarter. Total capital adequacy ratio stood at 18 per cent, remaining well above the 13 per cent mandated, including the 2.5 per cent capital conservation buffer requirement and the 8.5 per cent Tier1 Ratio, prescribed by the Central Bank regulations in compliance with Basel III guidelines.
Image Credit: Babudas Augustine and Vijith Pulikkal