Banks unable to leverage liquidity

Banks in the UAE have sufficient financial resources but are unable to properly utilize these funds in the absence of a domestic bond market, the central bank governor was quoted on Thursday as saying.

Sultan bin Nassir al Suwaidi also said there was a need to review laws in the financial sector following the 2008 global fiscal distress, adding that a new law on high-quality assets is being developed by the central bank.

Quoted by local newspapers, Suwaidi said banks had no problem enforcing Basel 3 regulations on capital adequacy on the grounds they enjoy a strong financial position and their adequacy is already good.

“The UAE banking sector has no problem of liquidity or application of Basel 3…the problem is in managing this liquidity in the absence of government bonds,” Suwaidi said after a seminar in the capital on Wednesday.

“So, we need to pool our efforts to set up a government and corporate debt market for high quality bonds so banks can invest in them.”

The UAE has approved a government debt law while the finance ministry is in the process of completing measures for bond issue, which could be used in funding development projects rather than financing budget deficits.

Suwaidi has often called for creating a bond market in the UAE to tap domestic capital and create a benchmark for these safe investment instruments.

In his remarks Thursday, Suwaidi said the banking sector had been affected by the global crisis as part of its overall impact on the economy not because of flaws in the legislations governing this sector.

“But the crisis has also increased the need for a continuous review of our laws and legislations to cope with economic changes……so it is normal that these laws will be reviewed from time to time to match developments in the domestic and global economy,” he said.

“The central bank is now in the process of developing a new law to regulate high-quality assets which banks must keep as a guarantee for liquidity shortages.”

The UAE has the largest banking sector in the Arab world, with its 23 national banks and 28 foreign units controlling nearly Dh1,695 billion in assets at the end of March. Their collective capital stood at around Dh278 billion and their combined adequacy at nearly 20.7 per cent.

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