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United Arab Emirates Table of Contents

United Arab Emirates

Banking and Finance

The Indian rupee was the principal medium of exchange in the amirates until 1966, when Abu Dhabi began using the Bahraini dinar and Dubayy and the northern amirates switched to the QatarDubayy riyal. The federal Currency Board was established in 1973 to manage the new national currency (the UAE dirham, divided into 100 fils). The UAE dirham was officially linked in 1978 to the special drawing rights (SDR--see Glossary) of the International Monetary Fund (IMF--see Glossary); in practice, however, the UAE dirham was pegged to the United States dollar. The rate of Dh3.67 to US$1 has held constant since the end of 1980.

Reluctant to transfer financial accountability over local banks (including ones in which they had major interests) to outsiders, the ruling amirs refused to give the Currency Board, managed mainly by foreigners, any control over banking. In the midst of an oil boom, banks proliferated, credit expanded, and real estate speculation was rampant, creating a chaotic financial environment. In 1975 a moratorium on the opening of new banks was imposed, temporarily lifted, then reimposed. The board's lack of foreign exchange meant it could not support the UAE dirham in 1977 when a massive run on the currency led to a financial crisis and the collapse of two banks. In late 1980, a law converting the Currency Board into a central bank took effect. Although the Central Bank had more authority than the Currency Board, it encountered opposition from various members of amirate ruling families when it attempted to put new policies and regulations in place.

The Central Bank's responsibilities include issuing currency, maintaining gold and foreign currency reserves, regulating banks, and controlling credit to encourage balanced economic growth. It also advises the government on monetary and financial policy. In 1981 the moratorium on new banks was lifted once again. But in an effort to rein in the proliferation of banks, the Central Bank announced the same year that foreign banks would receive no new branch licenses and that foreign banks already operating in the country would be restricted to eight branches each by 1984.

The Central Bank took several measures in the early 1980s to strengthen the banking structure. It expanded audits and inspections, increased bank reporting requirements, established a computerized loan risk department, and set minimum capital requirements. The Central Bank also created a regulation that limited the size of a bank's loans to its directors. As a result of a violation of this regulation, administrators appointed by the Central Bank in 1983 took over the UAE's third largest bank, the Union Bank of the Middle East. The Central Bank and the Dubayy government bailed out the bank in the amount of US$380 million. Another bank, the Emirates Industrial Bank, was established in 1983 with capital of Dh500 million as a source of loans for new industries.

As a result of uncertainty in the wake of Iraq's August 1990 invasion of Kuwait, between 15 and 30 percent of customer bank deposits were transferred out of the UAE. At least two banks required injections of funds from the Central Bank to maintain liquidity, but confidence and deposits gradually returned. The Central Bank's governor was replaced in 1991 in the wake of the failure of the National Investments and Security Corporation.

Another crisis rocked the UAE banking sector in 1991 when the Luxembourg-registered Bank of Credit and Commerce International (BCCI) was shut down in most of the sixty-nine countries in which it operated. BCCI's troubles began in 1988 when two of its United States subsidiaries were accused of laundering profits from the illegal drug trade. Abu Dhabi's ruler and UAE president, Shaykh Zayid ibn Sultan Al Nuhayyan, is a founding shareholder in BCCI and in 1990 had purchased, along with others in Abu Dhabi, a 77 percent share in the bank. Having moved the bank's headquarters from London to Abu Dhabi, Shaykh Zayid ibn Sultan was in the process of restructuring the troubled bank when an audit commissioned by the Bank of England alleged major and systematic fraud by BCCI. That audit triggered the closing of most of BCCI's banks worldwide.

The ripples of the crisis spread throughout the UAE business community. In addition to its massive obligations worldwide, BCCI owed agencies in Abu Dhabi US$1.4 billion and private investors US$600 million. In October 1992, a Luxembourg court approved a US$1.7 billion compensation agreement between the bank's liquidators and the majority shareholders. The agreement called for the shareholders to pay 30 to 40 cents on the dollar to BCCI depositors.

Data as of January 1993

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United Arab Emirates Table of Contents