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Qualified Monetary Instruments


As per Union Law No (10) of 1980, the Central Bank of the UAE (CBUAE) can use a number of instruments to attain its monetary objectives. The fixed peg of the Dirham to the US dollar, however, means that local interest rates have to be aligned to those of the dollar across the maturity curve. As a result, the effectiveness of monetary policy instruments at the Central Bank's disposal has been reduced.

The CBUAE currently offers the following to commercial banks for managing their liquidity :

(1) the minimum reserve requirement
(2) Dollar/Dirham swaps for Dirham liquidity
(3) advances & overdraft facility for banks
(4) prudential regulation and
(5) CBUAE issuance of Certificates of Deposits and Repo facilities on Certificates of Deposit (CDs) held
(6) Liquidity Support Facility

1. Minimum Reserve Requirement:

The minimum reserve requirement ratio relates to the reserves banks are required to have at the Central Bank without interest. Monetary policy could be managed by controlling the level of these reserves, which in turn will impact the amount banks provide in loans to the economy.

Currently, the required reserves ratio is 14% on current, savings and call accounts, and 1% only on time deposits. In addition, banks are required to keep at the Central Bank 30% of their Dirham deposits abroad with non-resident banks (including their Head Office and branches in the case of foreign banks). The ratios on local customer deposits apply uniformly to Dirham and other foreign currencies


2. Dollar/Dirham swaps for Dirham liquidity

Dollar/Dirham swaps are a mode of injecting Dirham liquidity in case a bank needs access to Dirham. Swap arrangements involve a simultaneous sale and forward purchase of Dollars against the purchase/forward sale of equivalent Dirham amount for a fixed term at specified forward rates. Swap terms range from one week, one month, 3 months, 6 months, 9 months to 12 months. The swap facility was set up at the request of local banks to overcome temporary shortages of Dirham liquidity.

The facility is available to all banks operating in the UAE under the jurisdiction of the Central Bank of the UAE.

 

 

3. Advances and overdraft facility for banks

The Central Bank can provide banks with loans and advances for up to 7 days without collateral, and for up to 6 months against collateral. The Central Bank provides an overdraft facility to commercial banks that allows them to utilize their required reserves free of charge for up to seven days.

 

4. Prudential Regulation

A. Capital adequacy ratio

UAE banks are well capitalized with respect to Basel I requirement. The capital adequacy ratio in the UAE, should not be less than 10% according to CBUAE's requirement, compared to 8% Basel requirement, which was increased to 11% starting September 2009 and 12% starting June 2010.

B. Loan-to-Stable-Resources Ratio

Banks are required to maintain a loans & advances to stable resources ratio equal to one. The numerator comprises loans and advances (including interbank placements with a remaining maturity of more than three months), while the denominator comprises free capital and reserves, interbank deposits received with a remaining maturity of more than six months and 85 percent of customer deposits.

C. Personal Loan Limit

Personal loans are defined as loans that are given to individuals for specific purposes, secured by assigning salary and end-of-service benefits and any regular income from a well-defined source. The ceiling for personal loans is currently set at 250 thousand Dirhams. It is prohibited to include private houses of individuals or guarantees from nationals as securities for personal loans. At present, credit card loans are excluded from the personal loan limit.

D. Large Exposure Limits

With a view to curb excessive concentration of credit to a single borrower or a group of related borrowers, the Central Bank issued on July 16, 1994 an update of Circular 19/93 relating to the monitoring of large exposure limits to banks, banking groups, members of a bank's board of directors, and the bank's own employees. Aggregate large exposure limit is currently set at 8 times the capital base of the bank.

 
5. Certificates of Deposit

Certificates of Deposit (CDs) are issued by the Central Bank, as a tool for liquidity management. The system was essentially demand-driven as banks with excess liquidity can invest their surplus funds in CDs of varying maturities. The CDs program was launched in 1985, amended in 1994 and in 2007.

 

The New Expanded Central Bank CDs Issuance System became effective 28 November, 2007. It is an auction based issuance for CDs denominated in UAE Dirhams, US dollars and Euros (data on CDs outstanding is published on the Central Bank Balance Sheet and the Central Bank Statistical Bulletin).

CDs of shorter maturities ranging from 1 week to 12 months are issued daily while CDs of longer maturities ranging between 2 years to 5 years are issued on the first Monday of each calendar month.

Under the new issuance system, banks can repo their CDs with the Central Bank of the UAE or between themselves to access liquidity. The repo term offered by the Central Bank is upto 3 months as long as the CD being used as collateral has a balance life beyond the repo term. Banks can also seek Dollar term funding by using their holdings of CDs as collateral.

Banks can redeem CDs with the Central Bank at any point during the life of the CD as long as the CD is free from any encumbrance.

 

6. Liquidity Support Facility :


This facility was set up in September 2008, when banks were facing a shortfall in liquidity due to the global financial crisis. Under this facility, a bank can submit its portfolio of securities to the Central Bank of the UAE for evaluation. The Central Bank will accept those securities as eligible which satisfy its guidelines and assign a line to the bank based on the value of the eligible securities after adjusting for haircut applied to each such accepted security. The bank can then access Central Bank funds on a weekly rollover basis for as long as they need the facility.

 

        

Last Updated on 20, September 2017