UAE banks are on track to implement the Basel II Accord by the stipulated deadline of January 2008, a senior banking official said.
"All the banks are adopting Basel II and are in good position to implement it by the deadline. Many of the banks have done the calculations they need to do," the official said, requesting anonymity.
The UAE Central Bank has announced phased implementation of the Basel II Accord, with compliance on a standardised approach for credit risk by December 31, 2007, and with internal ratings for credit risk by January 1, 2011.
Dismissing reports that Arab nations have not yet worked out how to treat Islamic banking products under Basel II, the official said banks are "quite OK" with it.
The Central Bank's regulatory framework adheres to the core Basel principles. However, a recent Fitch Ratings reported the UAE's banking regulator has not been as strict in this respect in the past as, say, the Central Bank of Bahrain or the Saudi Arabian Monetary Agency.
According to Basel norms, supervision is through on-site inspection and review of periodic submissions from the banks. Frequency of inspection depends on the perceived risk of the bank, but is at least once every 18 months.
Prudential returns are made monthly, quarterly, semiannually or annually, depending on the nature of the infor mation they contain.
An improved risk management framework is currently being implemented, aimed at providing the Central Bank with more up-to-date information on credit, market and operational risks within the banking sector in anticipation of the introduction of Basel II, the Fitch report said.
For instance, UAE banks are prohibited from lending more than five times the margin provided by the customer for subscribing to initial public offerings.
Standard & Poor's believes the implementation of Basel II in GCC countries is not expected to have a dramatic impact on the credit ratings of Gulf banks.
"The compliance will improve transparency and will help regional banks improve their risk management sys tems and focus more on quantitative information and analysis. However, many will be challenged to find reliable regional data on corporate defaults," it said in a report.
According to Riskraft Consulting's chief consulting officer Dr Ashok K Nag, banks must look at Basel II as an opportunity that will help banks "measure, manage and mitigate" risk.
"Banks spend millions on technology, but they often fail to exploit the most cost-effective way. We want to work as their knowledge partners and help them exploit their systems effectively." The most important hurdle that banks in emerging market economies face in their effort to become Basel II compliant and derive competitive advantage from that effort is lack of credible, quality and granular data, Nag said.
Paid up capital under base I
Definitions of capital and risk-weightings currently follow those of the Basel Accord (Basel I) with the exception of GCC sovereign exposures, which are risk-weighted at zero per cent. Under Union Law 10 (1980), any commercial bank's paid-up capital shall not be less than Dh40 million.
Banks are required to transfer 10 per cent of net profit each year into a statutory reserve until this makes up 50 per cent of capital. Distributions cannot be made from this reserve, except in special legally defined circumstances. All dividends have to be authorised by the Central Bank.
By Parag Deulgaonkar
© Emirates Today 2007
