The UAE is hitting a serious obstacle in developing its financial markets because of the lack of a bankruptcy law, and risks falling behind other Arabian Gulf states, which are moving to address the problem.
UAE bankruptcy law needed to develop financial markets
The UAE is hitting a serious obstacle in developing its financial markets because of the lack of a bankruptcy law, and risks falling behind other Arabian Gulf states that are moving to address the problem, said the head of National Bank of Abu Dhabi.
Michael Tomalin, who retires next month after 14 years as the chief executive of the UAE's biggest bank, told The National that lenders and their clients faced a higher cost of doing business as a result of the way that banks must account for exposures to third parties.
The problem centres on the way that banks process the "netting" of foreign exchange contracts. For example, in many financial centres if a bank sells US$500 million to one bank, but buys $450m, it can "net" the two contracts and hold capital against a net exposure of $50m in the event of financial difficulties.
But this process is absent in the UAE, meaning the bank would have to provision for the gross $950m in the event of financial difficulties.
"To develop the UAE properly it has to become a netting jurisdiction," he said. "You'd need a bankruptcy law for that."
The UAE's long-awaited bankruptcy law has been in discussion since 2009.
But the lack of laws governing netting makes it more expensive for banks to do business.
"In the UAE, because there's no bankruptcy law, there's no allowance for netting," Mr Tomalin added. "Which means the capital computation that these banks have to apply is much higher on transactions. They have to put more capital on, and it means they're much more expensive for UAE banks."
Local banks were not incapable of netting transactions through offshore jurisdictions. But they face a disadvantage against bigger banks headquartered in other parts of the world as a result of the lack of netting laws, said Tim Plews, a finance partner at Clifford Chance.
"Insofar as this is a sensible risk management industry for banks to be involved in, our banks in the UAE or other GCC banks are shut out," he said. That means banks from Europe, Asia and the United States "get all the business".
The development of London, New York and other netting jurisdictions had underpinned much of the increased sophistication of those markets, Mr Plews added.
Some Arabian Gulf states are catching up. The central bank of Bahrain published a draft consultation paper this month on the implementation of netting laws.