Methods of Payment
A growing and attractive market for a wide variety of products, the UAE can be a difficult place for American firms to do business. Payments tend to be slower than in the US and Europe. Commercial Letters of Credit are extensively used as a mean of payment in overseas trade. The most commonly used type of L/C, include: Sight, Deferred Payment, and Revolving L/Cs.
Government tenders are accompanied by a bid bond in the form of an unconditional bank guarantee for five percent of the value of the bid. However, these rules do not apply to major project awards or defense contracts, where there is no local company that can provide the goods or services required.
How Does the Banking System Operate
According to United Arab Emirates (UAE) Central Bank data, the UAE banking sector grew on average by about 18 percent in 2004. Banks in the UAE fall in four broad categories: commercial banks, merchant or investment banks, Islamic Banks, and industrial banks. There are 21 locally incorporated banks with 312 branches and pay offices in the UAE and 43 branches abroad, 26 foreign banks with 110 branches, one restricted license bank, two investment banks, and 49 representative offices. The UAE Central Bank no longer issues licenses for new foreign banks to establish branches in the UAE. Local banks are exempted from any type of taxation whereas foreign banks pay a 20 percent tax on their profit.
The UAE Central Bank prohibits lending an amount greater than seven percent of a bank's capital base to any single customer. The bank defines a customer as an individual, a company, or a group of companies under common ownership, and capital base as local capital. Foreign banks with branches in the UAE are not permitted to calculate loans as a percentage of their global capital (which may however be used to calculate the capital adequacy ratio). In a revision to the rule in 1993, the Central Bank decided to exclude non-funded exposures, such as letters of credit and guarantees from the requirement. The Central Bank has also announced implementation of internationally recognized and accepted accounting principles, in the form of International Accounting Standard (IAS) number 30 on disclosure.
The current economic boom in U.A.E. has had a significant impact on the UAE Banking sector. Over the last year, the banking sector has grown at a faster rate than the rest of the non-oil economy, in terms of most indicators like deposits, loans, assets and profits. The consumer and retail banking in the country is undergoing a major transformation, with banking services and products reaching a far greater penetration in the economy. Islamic banking has expanded considerably in recent years, with conventional banks offering such services, besides the dedicated Islamic banks.
Almost all banks have shown enormous growth in profitability during the last year. The top five U.A.E. banks, National Bank of Abu Dhabi, National Bank of Dubai, Abu Dhabi Commercial Bank, Emirates Bank and Mashreq Bank, saw an average growth in profitability of around 50% in 2004 over 2003. Leading the profitability was ADCB with a massive 98% increase in profits.
Strong economic growth, high oil prices and revenues led the growth in the banking business. Demand for property and real estate has been a major cause of growth, which has fuelled a large demand for borrowing. At the same time retail banking has been on the increase because of a growing population as well as increased consumer demand for banking services, which has led traditionally corporate focused banks to provide more consumer products.
The increase in Islamic banking has been a major phenomenon in the U.A.E. banking industry in recent times. The number of dedicated Islamic banks in the country has now risen to four. A major part of the spurt has come from conventional banks which have recently stepped up their offers for such banking and financial services. Industry estimates put the share of Islamic banking at around 20% of the total banking business, but with a much higher share in retail banking. Evidently a strong demand has existed, but it is for the banks to offer such financial services, which they are doing now. Dubai Islamic Bank saw its profit grow by 97%, and Abu Dhabi Islamic Bank by 22% in 2003- 04.
The trade and building sectors receive a major share of bank loans. Banks lend to the services, trade, and building sectors due to the scarcity of major investment scope in other productive sectors. The oil sector is the province of the government and is beyond the reach of the banks. The Dubai Financial Market (DFM), officially opened in March 2000, preceded the Abu Dhabi Securities Market (ADSM) in November 2000. The ADSM opened with 13 listed stocks, and by late 2005 had 40 listings. Falling interest rates on bank deposits have produced a surge of interest in the DFM and ADSM, with total capitalization of the 76 firms listed on the two exchanges reaching over $125 billion by end of 2005.
A third financial center, the Dubai International Financial Center (DIFC) was officially launched in February 2002. While the World Bank expressed interest in the project, the initiative will be competing in a tough environment. With the launch of the three new financial markets, the UAE Central Bank has drawn up plans to establish the country's first credit rating agency. The government hopes that such a regulatory step will help attract back some of the US$400 billion that the IMF estimates is invested abroad by UAE investors.
Since the UAE Dirham is tied to the US dollar, interest rates in the UAE tend to parallel those in the US. The authorities believe that the exchange rate of 3.671 to the dollar, unchanged since 1980, promotes stability and confidence in the currency and mitigates against capital flight.
U.S. Banks and Local Correspondent Banks
Citibank is the only US bank in the UAE that offers full banking services. Bank of America and First Union have representative offices in Dubai. Bank of New York has a representative office in Abu Dhabi. A number of UAE banks either have branches in the U.S. or correspond with certain American banks to cater to the needs of their local and international clientele.
The development in the GCC of projects seeking financing is growing ever broader. From power and desalination complexes through petrochemical plants, gas development, and transportation projects, the role of the private sector in large-scale projects is becoming more varied and important. GCC project financing picked up dramatically in 2001 and stayed strong through 2003 and 2004 with over US$4 billion in project financing arranged in the last twelve months. Major international and local banks are behind these projects advising and arranging for the major part of the financing, exceeding 75 percent on some of the independent water and power projects. The proportion of financing and the transaction leadership is steadily shifting towards local and regional banks, including in some cases, Islamic banks.
In mid-May 2003, the government of Dubai officially launched a US$408 million bond issue on the Dubai Financial Market (DFM). The bond issue was a first in the UAE with the purpose of financing a variety of ongoing and new projects that Dubai has undertaken as part of its growth strategy. The bond issue was arranged and underwritten by a pool of local and international banks.