MONGABAY.COM
Mongabay.com seeks to raise interest in and appreciation of wild lands and wildlife, while examining the impact of emerging trends in climate, technology, economics, and finance on conservation and development (more)
WEEKLY NEWSLETTER
|
|
United Arab Emirates
Index
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
|
|