UAE Money and Banking System

UAE Money and Banking System


Indeed, development of the United Arab Emirates has been very successful, especially with the consideration that the country only attained its sovereignty in the year 1971 (Kumar, 2016). Despite its economic evolving, there is still variation in the economic progress of the state in relation to the political side of its development (Alzaman & Chikhalsouk, 2013). In this regard, the instance takes into consideration the natural process as the basis for construction of modern infrastructure plus the accomplishment of goals in a faster way in comparison to the industrialization taking place in economic, political and social spheres in the country (Alzaman & Chikhalsouk, 2013). The implication of this notable economic development that has been there in the state in the previous years and that is likely to take place in the coming years does not conform to the political reformation and the democracy in the country. For instance, the present high dependence on oil, plus also the continued rule of the seven families that constitute the United Arab Emirates does not lead to the bridging of gaps among them in the near future (Alzaman & Chikhalsouk, 2013). For this reason, this paper seeks to evaluate the evolving process of the UAE financial system with respect to its money and banking system throughout its history.

Evolving Process of the UAE Financial Structure

During the past, management of inflation was not such a major priority of the government (Gurrib & Alshahrani, 2013). Additionally, from the latest suggestion that use it for the application of basket in the determination of the consumer price index is indeed outdated. At the same time, the official values relating to rates of inflation do not match the real increment in the living costs as was earlier announced by the Ministry of Economy and Planning (Kumar, 2016). Further to the announcement, the Ministry said that there would be the establishment of the committee that would monitor the inflation trends in the country (Gurrib & Alshahrani, 2013). Despite the fact that other sectors such as the real estates, consumer goods and education have undergone a notable increment in their prices, the subsidies from the government on items such as fuel and services for the citizens of UAE have always been able to meet only the increment in the living costs (Gurrib & Alshahrani, 2013). For instance, the UAE dirham is, at present, is still pegged officially to the US dollar as much as there have been several calls for the floating of more plans in the wake of strength of other currencies such as euro (Kumar, 2016). On its side, the Central Bank operates by following the economic policies defined by the government right after attaining the independence (Maghyereh & Awartani 2012). Due to the involvement of the Central Bank from the time of the formulation of the policies, it, in this case, makes the country continue stabilizing in both its money and banking financial sector in the long run.

Many times there are several attempts to ensure the maintenance of the UAE stability based on both fiscal and debt policy. The instance here is due to the record oil prices and the stable levels of production that have led to the notable rise in the revenue of the government (Maghyereh & Awartani, 2012). However, the United Arab Emirates in normal cases records deficits in the consolidated accounts where, for instance, in the 2004 the budget almost balanced and, consequently, led to the small surplus (Maghyereh & Awartani, 2012). Similarly, the figures of the debt published in the past years that also had an average GDP value of 11%, in this way, should not be taken as a way of exerting pressure on the finance from the state since all revenues got from oil were also a part of the earnings while the investments made overseas were not included.

History of Dirham

Dirham is a term derived from the Greek word ‘Drachmae’ that literal meanings means ‘handful’. In the United Arab Emirates, Dirham was introduced in the year 1973 following its replacement of the Qatari and the Dubai riyal that were at par with each other (Maghyereh & Awartani, 2012). For instance, both currencies had been in circulation since the year 1966 in all the affiliates of emirates apart from Abu Dhabi where dirham had effectively replaced the Bahraini dinar with an equivalent of 0.1 dinar (Maghyereh & Awartani, 2012). However, before the year 1966, all the emirates that had the intention of forming the UAE initially used the Gulf rupee. Likewise in Qatar, the emirates had the temporary adoption of the Saudi riyal during the period of the transition from the Gulf rupee to the Qatar and Dubai riyal.

The year 1973 saw the introduction of coins in UAE in denominations such as 1,5, 10, 25 and 50 fils, and 1 dirham. In this regard, the 1, 5 and 10 fils got stuck in bronze of which the highest denomination emerged to be the cupro-nickel (Mehta, 2012). In this manner, the coins had similar sizes and composition in a correspondence to Qatar and Dubai dirham coins. By the year 1995, the 50 fils ad 1 dirham went through a reduction in their sizes where the new 50 fils took the equilateral heptagonal shape (Mehta, 2012). The value and the numbers on the coins follow the writings in Eastern Arabic numerals while the texts are in Arabic (Mehta, 2012). The 1, 5, and 10 fils coins are not frequently used in daily life and for this reason their value area always rounded to the closest multiples of 25 fils. Added to the same, the 1 fil is rare and, as result, does not experience significant circulation as well (Mehta, 2012). Since the year 1976, the currency board of the United Arab Emirates has indeed minted many commercial coins for the purposes of marking various events and regimes of the United Arab Emirates. 

In August 2006, it came into public knowledge that the Philippine one peso coin shared the same size with the dirham coin. Since one peso is only 8 fils, the instance has resulted into vending machine fraud in UAE (Squalli, 2006). The Pakistan’s 5 rupee coin, the Omani 50 Baisa coin and the Moroccan 1 dirham also share the same size with one dirham coin of UAE. However, despite all these serious fraudulent issues facing the dirham coin of UAE, there is a falcon watermark put on the notes as a step towards the prevention of all frauds on dirham notes (Squalli, 2006). On the same note, recently, the UAE Central Bank introduced the new 50 dirham note. Now, it has a security thread that is 3 mm wide, color-shifting windowed security thread, and it also portrays the new coat of arms which was adopted on 22 March 2008.

UAE Banking System

The reality is that there is a well-developed and a proper functioning banking system in the United Arab Emirates (Cherian & Farouk, 2015). In this regard, there are several big banks that carry out their businesses in the country, over 25 foreign banks and representative offices of other banks (Cherian & Farouk, 2015). On the same note, the competition that is high in the UAE banking sector due to presence of these many banks in the state indeed has very minimal impacts on the overall sector’s growth and development, its liquidity as well as profitability. Due to the requirements from WTO, extreme liberalization in the market permits the expectation for the entry of more foreign banks (Cherian & Farouk, 2015). In consequence, the Central Bank of the United Arab Emirates has already submitted for the participation of these many banks in the UAE banking sector. There are also some initiatives from the Dubai International Financial Center that, in this case, entails the creation of self-regulatory economic free zones (Cherian & Farouk, 2015). In this regard, the available vulnerabilities will continue to be there in relation to credit risk and as result leading to consumer lending and higher levels of competition in the prices.


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The outlook of banking system of UAE in the coming future seems favorable due to the fact that it has the support of non-hydrocarbon growth, low interest rates and also an expectation in the increases in the real estate prices (Cherian & Farouk, 2015). In this regard, there is a prediction of 11 percent growth in the loans as well as deposits in banking sector of the country as time progresses (Cherian & Farouk, 2015). Following this instance, majority of the asset quality issues have linkage with property sector that have experienced a rapid economic growth lately.

According to International Monetary Fund’s prediction, there is expected the growth in the country in loans given to the private sector in the future (Kumar, 2016). In this regard, the financial body predicts growth in the loans by 10% with time due to the Central Bank mission of regulation the exposures in the sector of the real estate. There is also an expectation of growth in the total number of companies that tap the capital markets to be capable of sustaining the financial needs of the country (Cherian & Farouk, 2015). Due to the revival of the UAE’s microeconomic fundamentals, there is an expectation of the UAE’s banking sector reaping a lot of benefits out of it. Since UAE is a regional hub, is has got a lot of benefits due its safe status quo following the eruption of the Arab chaos in the early periods of 2011 (Kumar, 2016). Likewise, there is a hope in the continuity of the growth of the real GDP in UAE where, in this case, it implies growth by about 4 percent (Cherian & Farouk, 2015). Similarly, the sectors of the country’s economy such as trade, retail sale as well as tourism also show strong positivity in growth (Cherian & Farouk, 2015). Added to the same, the sectors of the real estate and construction have indeed positive recoveries since the year 2012. Likewise, the majority of the Dubai’s government-related entities have also recorded successful development and a capability to finance their maturities. For instance, as it stands, banks in UAE are indeed in a stronger position in comparison to their status in the past ten years (Cherian & Farouk, 2015). On top of this, majority of banks in UAE seem to have walked out from the bottom and as result undergoing a lot of recoveries in most sections of Dubai economy.

The UAE banking systems has a strong relationship with the asset quality issues that also have linkages with the property secctor where a recent rapid recovery was witnessed (Squalli, 2006). For instance, a part of the loans is owned by the Dubai World that represents a principal state-owned holding and is in the category of the performing companies (Squalli, 2006). The banking system of UAE has been undergoing moderate growth annually. For example, there has been growth in the private sector and the GRE by 13 percent during previous years (Squalli, 2006). However, there is an expectation of growth in loans to come down by 10 percent in the future, due to the effect of Central Bank regulations with respect to exposure of the real estate sector plus the GREs on the same (Squalli, 2006). At the same time, there is also an expectation from several companies that tap into the country’s capital market to be in a position of sustaining their financial needs.

However, with time, there is an expectation of the UAE sector of banking to reap the benefits of strong revival of the country’s macroeconomic fundamentals (Squalli, 2006). The reason is due to the fact that UAE is a regional hub and, as a result, enjoys the benefits of the safe region ever since the eruption of the Arab wars in the 2011 (Squalli, 2006). Consequently, this advantage favors the investor’s confidence, especially those willing to carry out business in the banking sector of the country (Squalli, 2006). On the same note, cases such as the non-hydrocarbon real GDP growth in the state also reveal trends in the solid expansion by 4 percent. Likewise, aspects such as trade, retail sales and tourism, on their side, are registering positive strong growth all the time (Kumar, 2016). As it was already mentioned, the real estate and sector of construction have also witnessed positive recoveries since the year 2012 (Squalli, 2006). Moreover, the majority of the Dubai’s government-related entities have also recorded successful restructuring and refinancing of their maturities. In this regard, it vividly confirms that at present times, the UAE banks are in a much better position compared to the past in managing incidences of external shocks (Squalli, 2006). At the same time, the real markets in UAE have eased from the bottom and, as result, are experiencing recovery in certain regions of the country.

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Central Banking Functions in UAE

The functions of the Central Bank of UAE are;

  • Issuance of currency as provided in the law;
  • Stabilization of the country’s currency as well as ensuring the freedom of its conversion into foreign currencies;
  • Formulation and development of credit policies with the goal of achieving national economic growth of the state;
  • The Central Bank of UAE organizes and develops the banking sector of the country and monitors the levels of efficiency of the operation of the banking system in the state;
  • The Central Bank of UAE also serves the role of the Bank of Government of the country altogether;
  • The bank provides both monetary and financial advice to the government of UAE;
  • The Central Bank of UAE also plays the role of maintaining the reserves of gold and other currencies;
  • The Central Bank of UAE serves as bank of banks that carry their operations in the country;
  • The bank plays the role of financial representative in the international banking and financial institutions such as International Monetary Fund, the World Bank and many other international and regional financial bodies;
  • The Central Bank of UAE also has the authority to handle all the transactions that take place in the state.


As much as the present standing debt of Dubai is at $130 billion that, in this case, is a reflection of 132 percent of its GDP, the reality is that the actions of the country to refinance itself has resulted into the elimination of the doubts and the nation is capable of containing debts. Following this instance, it has indeed created a lot of confidence in the state’s sector of banking among the potential investors in the country’s sector of money and banking system. However, there are strong indicators of the average outlook of the UAE sector of money and banking relying on the global pace of recovery and on the financial progress made in the reformation in most of financial-related institutions in the state. On top of this, banks have recorded rehabilitated balanced sheets and the restriction on the non-banking financial sector as well as the notable improvements in the corporate governance and transparency as a whole. One should not forget about the strengthening that takes place in the federal fiscal and monetary institutions that is indeed a true confirmation of a more positive future growth and development of the UAE money and banking financial sectors.