Thu, 04 Dec, 2008
Business
Manage my Finance
Introduction
Developments in the financial services sector are designed to foster a properly regulated business environment in which economic development, especially diversification, can continue unabated.
Stock Markets
Efforts to establish an official stock exchange to regulate the informal market gathered momentum as the draft federal stock exchange law was approved by the federal Cabinet at the end of June 1999. The UAE has been working on setting up a formal bourse for some years. The draft law envisages the establishment of a Securities and Commodities Commission to be based in Abu Dhabi which will have the authority to license trading floors. The exchange is expected to have electronic trading based on two trading floors in Abu Dhabi and Dubai.
Stock Market Volatility
The UAE informal stock market witnessed a 26.74 percent surge in market capitalization in 1998, suggesting that investors had fared reasonably well despite the mid-year volatility and the prolonged downturn in the fourth quarter. Market capitalization on 1 January 1999 was Dh 116.42 billion, as compared with Dh 91.86 billion on 1 January 1998. It had, however, reached a peak of Dh 182 billion at the end of August 1998, at which point a correction occurred, sparking off the subsequent slide. In 1997 investors had witnessed a return of over 30 percent, while 1996 had seen a 5 percent dividend yield and a 20 percent surge in market capitalization. By late May 1999, the UNB Market Index had fallen to 111.4 points, 14.5 percent lower than it was at the beginning of 1999, despite the fact that corporate results for 1998 were generally good. Market capitalization stood at Dh 105.44 billion. However, stock values began to re c over towards the end of the summer and in the first week of September as many as 28 of the 43 stocks monitored recorded a rise. The UNB Market Index had also risen to 114.09 points, reflecting the improved market sentiment.
Stock Brokerage
There was a significant increase in the number of applicants seeking licenses to operate brokerage houses following the approval of the stock exchange law by the Cabinet. More than 34 applications were forwarded to the office concerned within a day of Cabinet approval for the local stock exchange. The Central Bank issued around 20 new brokerage licenses at the beginning of 1999, which increased the total number of brokerages to 57. The requirements stipulated by the Central Bank for granting brokerage licenses are stringent and it is up to the Central Bank to decide whether the market can accommodate more brokers or not. It was announced in July 1999 that the UAE Securities and Commodities Commission (SCC) is likely to authorize some UAE banks to undertake trading in stocks. Many of these banks already have operational stock-trading departments. Investors in emirates other than Abu Dhabi and Dubai, which will have trading floors, could conduct deals through banks nominated by the SCC.
Saadiyat Financial Center
The official UAE stock exchange had yet to be formally established at the time of writing this review (October 1999), but the Saadiyat International Stock Exchange (SISE), a completely separate bourse, was due to open in Abu Dhabi towards the end of 1999, initially functioning from a temporary location. SISE is expected to become a fully electronic, order driven market with 'straight - through processing' capabilities should market participants require. SISE will be fully supervised by a regulatory commission.
In July 1999 the Saadiyat Free Zone Authority (SFZA) signed a 50-year renewable concession agreement with Emirates Global Capital Corporation (EGCC) to develop the US $3.3 billion offshore financial market center, including SISE, Saadiyat Futures and Options Exchange, Saadiyat Commodities Exchange and Saadiyat Clearing House (for more information see section on Business Environment). The new commodities trading hub, the first in the region, is expected to net annual revenues totaling Dh 1.46 billion (US $398 million) by the year 2005 from commodities trading alone.
Feasibility studies predict that the Saadiyat market, which will serve a consumer market of about 1.5 billion people in the Middle East, Central Asia and East and North Africa, could emerge as the world's fifth largest capital market after those of New York, London, Tokyo and Singapore. The Saadiyat market will open on Saturdays and Sundays and will also cover the time zone gap of about three to five hours between markets in London, Singapore and Hong Kong, thus offering 24-hour global trading. The issue date has not been set as yet for the IPO which will be open to both UAE national and foreign investors. The Japanese bank Nomura was appointed to manage the international listing while the First Gulf Bank (FGB) and the National Bank of Abu Dhabi (NBAD) are jointly handling the local issue. The Abu Dhabi Government will be one of the major shareholders and it has already committed US $400 million to the capital raising programme. With projected indirect re venues of US $170 billion over 25 years, the project is expected to play an important role in the UAE's strategy for economic diversification.
Bank and Insurance
The UAE's banking and monetary system has made significant progress in recent years due to the Central Bank's increasingly strict control of financial institutions. In particular, 1998 was a year of impressive growth in the banking sector, attributable to some extent to adherence to the guidelines laid down by the Central Bank. In the last ten years, the Central Bank has played an important role in supervising the banking industry and has contributed in a measurable way to improving the quality of services and performance of a number of banks.
The number of locally incorporated banks increased to 20 in 1998 from 19 the previous year following the licensing of the Abu Dhabi Islamic Bank. Bank branches and cash offices rose from 262 (223 branches and 39 cash offices) in 1997 to 284 (243 branches and 41cash offices) in 1998.
In 1998 there were 27 foreign banks in the UAE, the same as the previous year, with branches and cash offices of these banks also remaining unchanged at 110 (109 branches and one cash office). Banca Commercial Italian continued to be the only restricted-license bank and the number of investment banks was unchanged at two.
The number of foreign bank representative offices in the UAE has risen steadily over the last couple of years, a trend ascribed to the flotation of a number of new companies and to the UAE's membership of the WTO. The Central Bank issued eight licenses for new representative offices in 1998, bringing the total of licensed representative offices of foreign banks and other financial institutions to 38, compared with 30 in 1997. The new representative offices licensed in 1998 we re Bank Gesellschaft Berlin AG, Qatar Islamic Bank, MID-MED Bank Plc, Abbey National Plc, Unit Trust of India, Prudential Bache International Ltd, Natexis Banque-BFCE and Union Bancaire Privee (CBI-TDB).
New administrative and accounting systems National banks are now required to adopt a new administrative structure which stipulates specific functions for top executives and in which top-level appointments will be subject to Central Bank approval. All banks and financial and investment companies in the UAE have also been directed by the UAE Central Bank to prepare their financial results in accordance with the International Accounting Standards (IAS) with effect from 1 January 1999. Considered to be a major initiative with far-reaching implications for the financial markets in the country, this move will bring about a quantum leap in the area of public disclosures by banks and financial and investment companies. IAS implementation in the banking sector is believed to be essential to ensure fiscal transparency and consistency and to enhance the sector's potential for integration with global financial institutions. The Central Bank will also implement IAS by the end of 1999. Bank regulations for Saadiyat Free Zone New regulations governing banks and financial institutions in the Saadiyat Free Zone have been adopted by Saadiyat Free Trade Zone Authority. Although functioning as offshore units, all banks will require a license to operate in the free zone. The general regulations and requirements for financial institutions reflect standards operating in international markets such as North America and Europe, while the code of conduct sets out the general controls which the Authority requires participants in its market to adopt in the course of their transactions.
Banks and insurance companies may be incorporated in the free zone as private or public limited companies. The minimum paid-up capital for a bank or insurance business starting operations in the zone is fixed at Dh 100 million and minimum capital for an insurance broker is Dh 1 million. Financial and commodities brokers may be incorporated as private or public limited companies with a minimum paid-up capital of Dh 50 million. The regulations stipulate that banks or insurance companies incorporated outside the Saadiyat Free Zone may set up branches in the free zone, but must have the consent of the home regulator to do so.
The authority must satisfy itself on the nature and scope of supervision, including capital, other financial resources and liquidity requirements conducted by the home regulator. The minimum capital for a branch is also Dh 100 million. Exemptions from corporate taxation and bank reserve requirements and the absence of restrictive legislation as regards staffing and deposit-taking, as well as the ability to set its own price for the major currencies, stocks and commodity groups, will ensure that Saadiyat emerges as a major international banking center.
Abu Dhabi Islamic Bank
The Abu Dhabi Islamic Bank (ADIB), the world's biggest Islamic banking institution, was officially opened in the capital by Sheikh Abdulla bin Zayed Al Nahyan, Minister for Information and Culture, in April 1999. The bank is fully committed to becoming a major contributor to the social and economic development of the UAE. A team of professional, experienced bankers with a thorough knowledge and understanding of Islamic banking will manage the bank in accordance with international banking standards. In contributing to the local economy through Islamic financing, the bank provides opportunities for both commercial investment and service projects, there by improving the returns on investment for its customers.
The ADIB with a paid up capital of Dh 1 billion was founded as a joint stock company under an Emir decree issued by Sheikh Khalifa bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces.
Fifty - five percent of its capital has been raised through public issues of shares with a par value of Dh 10, and the remainder is distributed between the Abu Dhabi Government (10 per cent) founders' subscriptions of Dh 390 million and the Private Department of President His Highness Sheikh Zayed bin Sultan Al Nahyan which has invested Dh 50 million. The bank, which opened its doors to the public on 11 November 1998 at premises on Najda Street, provides a range of retail and corporate banking services and carries out its business activities in strict conformity with the principles of sharia.
Emiratisation
The UAE Central Bank and the Human Resources Development (HRD) Committee for Banks will assist in implementing Cabinet Decree No.10/1998 which requires banks to increase national employment by 4 per cent annually. Implementation of the decree is of major importance since the sector is strategic to the national economy. The annual increment of 4 per cent was arrived at after due consultations with all the banks, which felt they could comfortably accommodate this level every year. In fact, the number of UAE citizens working in banks jumped from 1,068 in 1995 - when the HRD Banking Committee started operating - to 1,650 by the end of 1998. The number of nationals employed by UAE banks rose from 736 to 1,187, and those in foreign banks operating in the UAE from 328 to 463. While the UAE banking sector has an average 12 percent national staff component the figure varies markedly between individual commercial banks. Nine banks have more than 15 per cent, 17 have a 10-15 percent component, eight have a 5-10 per cent component, and around 15 banks have a national staff strength of less than 5 percent. The committee sought explanations from the bottom-placed 15 banks for their below-par performance.
Banks have welcomed the Cabinet resolution and have made serious efforts to attract national employees. The Central Bank, which is empowered to penalize banks failing to meet the target, will address the committee every six months to brief it on progress in implementing the decree. As the emiratisation process gains momentum there is a move to widen the scope of the HRD Banking Committee from the present twin-pronged focus on banks and educational institutes.