The banking sector in the United Arab Emirates has undergone a series of revolutionary changes over the years as the country seeks to align its financial policies to those of the international community. These changes have played a major role in defining the way banking institutions operate in this country. All the local banks operating within the United Arab Emirates are expected to operate within these laws. In this paper, the researcher will analyze the changes that have taken place in the banking sector within this country and how these changes have impacted on the financial institutions, giving specific focus to Abu Dhabi Commercial Bank. The bank started its operations in 1985 as a public shareholding company with limited liability following a merger of Emirates Federal Commercial Bank with Khaleej Commercial Bank. The bank has been operating under the local laws and regulations in the banking sector within the United Arab Emirates.
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The government of the United Arab Emirates, through the relevant ministries, and other private stakeholders has been working very closely to come up with rules and regulations that will help guide the financial sector in this country. As Ṣabrī (2008) notes, it is not possible to enact laws that would be considered self-sufficient for a long period of time. The world keeps on changing due to the changes brought about by the emerging technologies. When these changes occur, it becomes necessary for a country to adjust its laws and regulations to be in line with those of the international standards to make the local systems relevant. For this reason, the government of Abu Dhabi has been working very closely with all the relevant stakeholders to come up with new laws and regulations from time to time in order to maintain their relevance. It is important to look at some of the changes in laws and regulations that have taken place in the financial sector in the country and how they have affected banks such as Abu Dhabi Commercial Bank.
Domestic financial industry: Legal regulations
Major changes that have occurred in the financial industry within the United Arab Emirates started with the Federal Regulatory Act of 1980 that established the United Arab Emirates’ Central Bank. This Act defined the role of the central bank and its powers in regulating the banking industry. Article 5 number 4 of the constitution of this country defines how the central bank should be responsible for various regulatory formulations and how it should involve the private stakeholders in the process. Other than the formulation of laws and regulations, the central bank was also assigned the responsibility of advising the government on various issues of concern in the financial sector. The Federal Law of 1980, Article 78(1) focused on the commercials banks. This was the beginning of a close monitoring process of the commercial banks in the country by the government. The government realized that it needed to have a close control of the activities of the commercial banks in this country to eliminate unethical or illegal business practices and create a fair business environment for all the players in this industry. Banks such as Abu Dhabi Commercial Bank had to adhere to these laws and regulations and the changes that were made thereafter.
One of the major changes in the regulations of the banking sector was made in 1988 through an Act. It prohibited all the banking institutions from engaging in non-banking activities. The Act also defined how commercial banks can sell or buy shares of other institutions within and outside the country. Article 94 focuses on the issue of credit facilities that the commercial banks issue to their customers. In this article, the power to set rates of interest was handed over to the central bank. The central bank would change this interest based on the current status of the economy. According to Fund (2012), one of the areas in the banking sector that has raised controversy over the past decades is the issue of Islamic Banking. The United Arab Emirates is a predominantly Islamic country. This means that many Emiratis find Islamic banking relevant given their religious beliefs. Islamic banking follows the Shariah law very closely, and this means that they do not charge interests on loans. However, commercial banks such as Abu Dhabi Commercial Bank make most of their profits from the interests charged on the loans.
Over the years, the United Arab Emirates has been working closely with the relevant stakeholders to find a way in which the Islamic banking can be modified to remain attractive to the financial institutions. This was necessitated by the emergence of some major cities in this country as strategic international business hubs. Dubai is currently one of the leading business centers in the world. This makes it necessary to have a banking system that will not only meet the needs of the local population, but also that of the international community. Law Number 1 of 2002 issues by the government of Dubai focuses on the issue of mortgage. This law has been repealed to reflect the changing environmental forces in the financial market.
These laws are very necessary given the changes taking place in various sectors of the economy in this country. According to Fund (2012), the financial sector is one of the most important sectors within the economy. It controls all the others sectors. This means that it should always be conscious of the changes which take place in various sectors in the government. Usa (2014) observes that the government has recently introduced new systems for commercial banks that should be used to set the interest rates in a bid to boost the economic growth. The system seeks to lower the rates in order to encourage the local business fraternity to go for loans to finance their operations.
How the changes in regulation will affect the current financial environment
According to Jeffreys (2013), no business entity can survive in a business environment that lacks proper legal and regulatory structures to define how various entities should relate. A bank such as Abu Dhabi Commercial Bank has numerous clients and other stakeholders who rely on it for various services. The bank requires clear laws and regulations that would protect its own interests and the interests of its customers. These changes in regulations have both positive and negative effects to various players within the financial sector. It is important to look at both the positives and negatives of these regulatory changes.
These changes in the regulations will have a number of positive impacts to the current financial environment. One of the major positive impacts is the ability of Islamic Banks to charge negotiated interests on the loans issues to clients (Jeffreys, 2011). As mentioned before, Islamic banking has remained unattractive in this country because the main source of their income is always sealed. The government, through the central bank, introduced a new system where the financial institution can negotiate with the client to borrow money at a small fee. The fee is negotiated to cater for the operational costs of the bank in order to enable it survive within the competitive market. The new strategy has attracted a number of financial institutions, including Abu Dhabi Commercial Bank, to the Islamic banking.
Another major regulatory change that has affected all the commercial banks in this country is the on the interest rates charged on the loans. According to Jeffreys (2013), the United Arab Emirates, just like many other countries, allowed forces in the market to determine the interest rates charged on loans by the commercial banks. However, the government realized that the commercial banks were manipulating these forces to their favor, leading to very high interest rates issued by the lenders. Many of the commercial banks borrow money from the central bank at the interest rates of 4% or even less. However, when it comes to lending this money to the public, they charge as high as 17% or even more (Jeffreys, 2013). This has widely been seen as an unfair business deal on the side of the banks. With the new regulatory policies put in place, customers are set to enjoy reduced rates in the market.
The decision of the government to align its accounting systems and other monetary policies to the international standards has benefited many local business entities in the country. As Jeffreys (2011) says, the accounting system that was used in the country in the past made it difficult for the local business entities to access the international capital market. In many cases, firms seeking international funds had to follow tedious and lengthy processes to restructure their accounting systems and financial documents. However, the recent changes have made it possible for these entities to access the international capital market without any punitive processes that existed in the past.
According to Ṣabrī (2008), some players have suffered under the new regulatory policies that exist in this industry. This scholar says that it is very important to allow the forces in the market to determine the pricing of the products. The decision by the central bank to define the pricing of the loans has been seen as a direct interference. Abu Dhabi Commercial Bank now lacks the capacity to decide on the interest rates it charges its customers. It can only follow the guidelines put in place by the government. Some of these policies are also ignorant of the differences in the role of government as a regulator. Fund (2012) says that a regulator should be impartial. When the regulator becomes an interested party in the activities it regulates, then cases of conflict of interest cannot be avoided. The law allows the government to become a major player in the financial sector through the ownership of shares or even a whole bank. This means that the same government will be expected to regulate its own activities.
Feasibility of the changes in the local legal and political environment
The changes made in the financial sector in this country have been seen by many as a timely decision. However, it is important to note that these laws and regulations can only make sense if they are feasible in the local legal and political environment. Inasmuch as the country may desire to meet the international standards, it can only do so if it has the capacity and goodwill towards the same. The legal environment of this country has remained dynamic over the past few years following the massive developments witnessed in many towns and cities in this country. According to Hassan and Lewis (2007), the legal environment in the United Arab Emirates has advanced, and this means that it can sustain the new changes set to align the local financial environment to that of the international standards. The political environment has also remained very stable. The country has witnessed a prolonged period of political stability over the decades. As Ṣabrī (2008) observes, the United Arab Emirates is one of the few countries in the world that have never experienced any serious political strife. This means that there is a political unity and goodwill to support any new legislation that the government enacts.
The need for changes in current enforcement
The current enforcement is sufficient to guide the process of implementation of the law. However, it can be improved if the government may be willing to make some changes. One of the areas that need change is the policy that allows the government to be an active player in the financial sector while still acting as a regulator. This may bring a conflict of interest. The government should restrict itself to being a regulator in this industry. The government should also make a commitment to involve other private players such as the commercial banks when coming up with major policies that affect the industry.
Impact on the financial managers and the economy
These new laws will also have an impact on the financial managers. The law that regulates the interest rates charged on loans will force the financial managers to redefine their strategies in order to increase the sources of income other than just the interest rates earned. The new Islamic banking systems will also force these managers to design products that will still appear to be in line with Shariah law while still benefiting from the new policies. To the managers of commercial banks such as Abu Dhabi Commercial Bank, it will be necessary to set new strategies to capitalize on the benefits brought about by the new law. To the economy, it is expected that the new law will boost growth. Reduced interest rates will boost borrowing, and this will in turn result into rapid economic growth. The new Islamic banking principles are expected to attract many international investors into the local economy.
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The legal and regulatory environment of the financial industry in the United Arab Emirates has witnessed a number of changes in the recent past. The government has been keen on aligning its financial system to that of the international standards in order to make trade processes simple. These changes have had major impacts on the operational policies of commercial banks such as Abu Dhabi Commercial Bank. Although most of these policies have been beneficial to the players, a section of the stakeholders have complained that some laws encourage direct government interferences in the free trade in the market.
Fund, I. (2012). United Arab Emirates. Washington: International Monetary Fund.
Hassan, K., & Lewis, M. (2007). Handbook of Islamic banking. Cheltenham: Cengage.
Jeffreys, A. (2011). The report: Ras Al Khaimah 2011. London: Oxford Business Group.
Jeffreys, A. (2013). The report Sharjah 2008. London: Oxford Business Group.
Ṣabrī, N. R. (2008). Financial markets and institutions in the Arab economy. New York: Nova Science Publishers.
Usa, B. (2014). United Arab Emirates insolvency laws and regulations handbook: Strategic information. New York: Intl Business.