UKDigitalFinance19
Research Note

Proactive—The new buzzword in the transformation at the Central Bank of the United Arab Emirates

By Farrah Brake

The Governor of the Central Bank of the United Arab Emirates, His Excellency Mubarak Rashed Al Mansoori discusses the transformation of the UAE Central Bank under its new Medium-Term Plan. Among others, the Central Bank will focus on SMEs and the private sector in line with the government’s thrust to move the economy away from dependence on oil production.

Multiple government institutions are restrategising and taking proactive measures for the future. Combined with de-risking, dollar clearing, and anti-money laundering, discussion on the transformation and role of central banks is a phenomenon taking place across the globe as central banks particularly in the developing world respond to changes. In the United Arab Emirates (UAE), the Central Bank is taking proactive measures to address the ever-changing environment marked by the global economic crisis.

“The objectives of the Central Bank revolve around diversification of the economy, which will rely less on oil going forward,” according to Central Bank Governor His Excellency Mubarak Rashed Al Mansoori. The Central Bank vision is in line with the UAE government’s medium- to long-term plan, which has brought significant changes in the cabinet and emphasis on the health care and educational sectors to make these industries more cost-effective while providing enhanced services.

The Central Bank’s primary responsibility will continue to be ensuring the financial stability of the banking sector and ensuring that banks retain a strong capital adequacy ratio. However, the central bank will do things differently going forward, reveals H.E. Al Mansoori, and this is to encourage more growth within the private sector. This growth will be bank-driven and will also focus on the small and medium-size enterprises (SME) sector, he said.

The area of SME financing has long been a concern of the Gulf Cooperation Council region specifically the UAE, which is looking at diversification and enhanced gross domestic product growth from this sector. There has been much discussion about the lack of funding for SMEs and what can be done to provide more access to funds. The governor explains the issue is not a lack of available funds but lack of incentives as banks are not incentivised to lend to the private sector or SME sector, which are perceived as risky investments.

“There are many administrative issues surrounding these sectors, and banks would rather deal with large corporates and government entities due to their size and shareholder base, which differ greatly from that of the private and SME sector,” His Excellency explained.

Despite the tightening of liquidity within the country, lending has not ceased. However, the governor stated that while banks have been lending, the sector must look at pursuing greater efficiency. This includes building an ecosystem that brings together law and regulatory institutions, as well as investors to further expand credit offering. In addition, the SME sector needs further improvement in skill sets and financial literacy in order to meet the reporting requirements of these institutions.

Technology infrastructure, restructuring, and capacity building
The Central Bank’s 2017–2021 strategy has been developed in light of the new UAE government’s initiatives. The new medium-term strategy takes into account the foundational elements required for the new challenges, namely, infrastructure and capacity building. A number of key areas of improvement have been outlined in order to implement best practices and to make the Central Bank up to global standards. These include upgrading the Central Bank’s capabilities as well as technology infrastructure, organisational restructuring, and capacity building for employees. Restructuring of the departments is under way, with a new dedicated research team established, along with specialised teams focused on specific areas such as exchange houses and finance companies.

Revamping the human resources department to align with international best practices and support human capital development will continue. The Central Bank is streamlining its recruitment process and has instituted a training academy that provides continual training courses for new and existing staff to further enhance their skill sets. In addition, succession planning is an area the personnel department is looking into, as it tries to capture the expertise of Central Bank employees who have over 30 years of experience with the institution to preserve the institutional memory of the bank.

In line with the new strategy and focus on employee engagement, the Central Bank is examining how the transformation is viewed by the staff. There have been several working sessions throughout the ranks, to solicit feedback and suggestions regarding the new approach of the Central Bank.

“I am amazed at the level of energy and enthusiasm of the staff towards the new strategy, as many staff had ideas to contribute to the strategy,” H.E. Al Mansoori said. “The Central Bank wants to set an example within the international community, that despite being a small country, the United Arab Emirates is a dynamic and creative culture.”

“My dream is one platform where you could pay for everything”
The introduction of telecommunication companies, peer-to-peer, and shadow banking has taken centre stage and is contributing to economies across the globe. “Cybercrime and technology are key areas that central banks must be forward-looking on, in order to cope with them,” agreed the governor. “Technology enhancements remain a key focus for the financial services industry, which does not exclude the Central Bank that is looking at upgrading multiple systems.”

Meanwhile, with increasing pressure from the customer on central banks around the world regarding payments and fintech, the Central Bank is prepared for a “push-back” from the customer. However, it does not want to have a customer demanding something it is unprepared for, admits H.E. Al Mansoori.

“I believe we are at a time digital payments have no recognisable benchmark,” he states. “As to fintech, the Central Bank wants to be in the centre of the discussion, and have a position on the subject in advance, instead of being taken by surprise as other countries have with the launch of mobile technology.” This requires taking a stance on the issue and being ahead of the movement, which requires a range of internal capabilities inside the bank, he stressed.

The issues of fintech and payments are not unique given the scale of outward remittances from the Gulf countries. Hence, the banking sector in the region is working to capitalise on fintech and payments through products that offer direct remittance services to nonaffiliated banks outside the region. 

The UAE Labor Ministry requires all employers to pay employees through banks and/or money exchange houses. Therefore, many companies in construction and transportation industries now directly transfer employee salaries to money exchange houses, where employees can go and directly remit their salaries from. Transmitting salaries directly to exchange houses is one way the Central Bank promotes financial inclusion as many workers are unable to maintain the minimum balance required for a free current account.

His Excellency believes financial inclusion includes having access to the financial system, one way of which is by working with exchange houses as a medium for employees to receive their salary. If issues do arise, then the system will have to be changed, but for now the system seems to be satisfactory, said the governor.

Another initiative from the Central Bank on financial inclusion and creating a comprehensive ecosystem is building a country-level digital payment system. The Central Bank is planning to play a major role in policy setting for different sectors where the banking sector is not providing a service accessible to the entire population. This participation may be prescriptive and possibly engage other entities such as telcos and other contenders. This would also require regulations that encompass all financial institutions and partners.

In the area of digital payment systems, the digital payment system would be low-cost for low-wage employees, but may be costly for other institutions such as banks and telecommunication companies, stated His Excellency. He said legislation is currently being crafted, in line with new regulations covering this broader spectrum of banks and telecommunication companies.

The area of digital payment systems needs further expansion, and H.E. Al Mansoori is encouraging institutions to work together to create a common platform where people can use their smart phones to do multiple transactions from a single platform instead of one platform for each transaction type.

“My dream is one platform where you could pay for everything,” he emphasised. Under Central Bank leadership, several entities have already come together to create a comprehensive ecosystem to build a country-level digital payment system.

Inextricably linked
Expansion of the role of the Central Bank will involve enhancing its role as facilitator among multiple institutions to create an ecosystem that promotes economic diversification, specialisation, and depth of offering. In this way, the bank is seen as proactive rather than reactive. However, as change happens from the outside going in, the Central Bank has recognised not only its role in external matters, but the need for organic change within the institution itself.

Internally, organisational restructuring and capacity building for employees remain a long-term objective as the Central Bank prepares for the future. Creating a centralised digital payment system for paying bills, parking, and coffee may be a unique offering that makes the UAE Central Bank different from its peers and recognised as a benchmark for payments in the Middle East. Its role as a facilitator among institutions to provide further funding to SMEs and private sector will further diversify the economy. These and more, are how the Central Bank of UAE is reinventing itself for the future.



Categories: Payments, Regulation, Risk and Regulation, Technology & Operations
Keywords: UAE Central Bank, SME, Liquidity, Technology Infrastructure, Fintech, Digital Payments, Financial System
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