Central Bank of the UAE: Annual Report 2021

Transcription

1. Annual Report 2021 Year of the Fiftieth www .centralbank.ae
2. Central Bank of the UAE ANNUAL REPORT 2021 THE LATE H .H. SHEIKH KHALIFA BIN ZAYED AL NAHYAN
3. Central Bank of the UAE ANNUAL REPORT 2021 H .H. SHEIKH MOHAMED BIN ZAYED AL NAHYAN PRESIDENT OF THE UNITED ARAB EMIRATES
4. Central Bank of the UAE ANNUAL REPORT 2021 The new AED 50 banknote was presented to the Rulers of the UAE on 2nd December in celebration of the UAE 50th national day . 06
5. Central Bank of the UAE MESSAGE FROM H .H. SHEIKH MANSOUR BIN ZAYED AL NAHYAN, DEPUTY PRIME MINISTER AND MINISTER OF PRESIDENTIAL AFFAIRS CHAIRMAN OF THE BOARD OF DIRECTORS ANNUAL REPORT 2021 Contents The CBUAE Board of Directors Message from the Chairman of the Board of Directors Message from the Governor The CBUAE at a Glance Highlights of the CBUAE’s History Board Level Committees Executive Level Committees 02 04 06 08 10 12 13 Part 1 Economic and Financial Market Developments 14 Chapter 1 International Economic Developments 15 Chapter 2 The UAE External Sector 21 Chapter 3 Domestic Economic Developments 27 Chapter 4 Financial Markets Developments 35 Part 2 Key Highlights in 2021 46 Main Organisational Highlights 47 Latest Developments in the Targeted Economic Support Scheme (TESS) New Strategic Plan for 2023-2026 Supervision of AML and CFT Measures Supervision of the Banking Sector, Payment Systems and Exchange Houses 5. Supervision of the Insurance Sector 6. New Developments in Islamic Finance 7. The Green Economy: CBUAE Makes Important Advances in Sustainable Finance 8. Measures to Strengthen the Resilience of the UAE Financial System 9. CBUAE Enforcement Actions across Sectors 10.New Instruments in the Management of the UAE Monetary Market 11.New Action on Foreign Exchange Reserve Management 12.Improving UAE Payment Systems 13.Digital Transformation: FinTech Sector Initiatives 14.Strengthening Consumer Protection 15.Managing Information, Cyber Threats and Other Operational Risks 16.Investing In People: Creating a Performance-Based Culture 17.Keeping the Public Informed: CBUAE Communications in 2021 48 50 51 1. 2. 3. 4. 54 56 57 58 59 60 61 61 62 64 68 69 70 71 Part 3 Financial Reporting 72 Balance sheet – at 31 December 2021 73 Appendix 75 1
6. Central Bank of the UAE ANNUAL REPORT 2021 THE CBUAE BOARD OF DIRECTORS H .H. Sheikh Mansour Bin Zayed Al Nahyan Chairman H.E. Abdulrahman Al Saleh Vice Chairman H.E. Jassem Mohammad Buatabah Al Zaabi Vice Chairman H.E. Khaled Mohamed Balama Governor H.E. Younis Haji Al Khoori Member 2 H.E. Ali Mohammed Bakheet Al Rumaithi Member H.E. Sami Dhaen Al Qamzi Member 3
7. Central Bank of the UAE MESSAGE FROM H .H. SHEIKH MANSOUR BIN ZAYED AL NAHYAN DEPUTY PRIME MINISTER AND MINISTER OF PRESIDENTIAL AFFAIRS CHAIRMAN OF THE BOARD OF DIRECTORS ANNUAL REPORT 2021 The resilience characterising the UAE’s banking and insurance sectors played a prominent role in defining a benchmark for dealing effectively with future crises, without compromising the principles of sound risk management. Despite the numerous economic challenges caused by the COVID-19 pandemic in 2021, the UAE was able to excel on the economic front, and even improve its competitiveness, thanks to the overall vision and timely policies enacted by our leadership. The International Monetary Fund noted our nation’s unique ability to face the repercussions of COVID-19 in its Annual Report for 2021, which praised the UAE for its strong and proactive response to the pandemic’s effects. The report noted that the UAE has managed to continue implementation of its policies aimed at supporting economic growth. The resilience characterising the UAE’s banking and insurance sectors played a prominent role in defining a benchmark for dealing effectively with future crises, without compromising the principles of sound risk management. This aligns with international best practice, which has reinforced confidence and credibility in the nation’s financial services sector. This success is in line with the goals set by the CBUAE in its latest strategic plan (2023-2026) to be among the top central banks globally, strengthening the nation’s monetary and financial stability mechanisms and supporting the competitiveness of the economy. This plan aligns with the government’s ambitious development vision for the next five decades. I commend the CBUAE’s continuous efforts to strengthen the Anti Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework in the country. Tainted money is not acceptable and has no place in the UAE’s financial system. It is also noteworthy that the CBUAE has established the “UAE Sustainable Finance Working Group”, in collaboration with the Ministry of Climate Change and Environment, with the aim of coordinating policies across ministries and key financial institutions. This coincides with the UAE preparations to host the COP28 global climate summit in Abu Dhabi in November 2023, an event that bears international testimony of the UAE’s commitment to sustainability. Financing mechanisms and financial considerations will undoubtedly play a major role in shaping the future of this domain. In conclusion, I would like to extend my sincere thanks and appreciation to the CBUAE’s Governor and his team of dedicated professionals for their continuous efforts to maintain a stable and resilient financial sector and enhancing its capability to respond to all types of challenges, in a manner that meets the aspirations of our wise leadership, and ensures the nation’s prosperity, its economic growth and the well-being of its people. In celebration of the 50th anniversary of the founding of the UAE, the CBUAE issued a new AED 50 dirham banknote – the UAE’s first currency note made of a fully recyclable polymer material. A number of commemorative silver coins were also issued on this occasion, embodying the CBUAE’s role in supporting the country’s development journey that has seen innumerable accomplishments and pioneering initiatives. 4 5
8. Central Bank of the UAE MESSAGE FROM H .E. KHALED MOHAMED BALAMA GOVERNOR ANNUAL REPORT 2021 2021 contained a mix of challenges and opportunities. The CBUAE played a critical role in steering the nation through the economic challenges of the COVID-19 pandemic. It applied a rigorous policy-based approach to the banking and insurance sectors that it regulates and supervises, responding to evolving economic developments and providing leadership in difficult times. I am pleased to report that the banking system is well capitalised, liquid and has the ability to support the growth agenda of the United Arab Emirates. Bottom-up stress tests to explore potential banking sector vulnerabilities showed that the UAE’s financial system is resilient and capable of withstanding the various scenarios while maintaining adequate capital and liquidity levels. The CBUAE also rebalanced its pandemic-related stimulus programme, the Targeted Economic Support Scheme (TESS), replacing measures designed to ease retail, corporate and banking pressures with more focused initiatives to support the recovery. Pursuing its continuous efforts to modernise its monetary operations, the CBUAE rolled out the Dirham Monetary Framework, including the issuance of Monetary Bills and the launch of new monetary instruments for liquidity management and forecasting – the Intraday Liquidity Facility and the Dirham Overnight Index Average (DONIA). We aim to increase the Dirham’s use to settle transactions within the Gulf Cooperation Council (GCC) and with our other international trading partners to relieve pressure on domestic entities to secure liquidity in foreign currency for cross-border transactions. Other regulatory framework enhancements in 2021 included changes in paid-up capital requirements for banks, consumer protection standards, regulation of digital payments and outsourcing of services. Our new Targeted Operating Model and organisational structure will assist our internal operations in meeting the future challenges and demands on the UAE’s financial system. The merger of the Insurance Authority into the CBUAE was completed last year, with substantive enhancements in the CBUAE’s supervisory and regulatory role. We welcomed all 120 employees of the former Insurance Authority to the CBUAE team. We underlined the importance of our human resources, raising the percentage of UAE nationals and expanding professional training opportunities. We also launched a pioneering training initiative in risk-based supervision in cooperation with the Irish Institute of Banking, a leading international organisation for training of finance professionals. 6 On the increasingly important cyber-security front, the CBUAE conducted a cyber war-gaming exercise – the first of its kind in the UAE. This tested the banking sector’s cyber-resilience and ability to deal with the sophisticated cyber-attacks that have unfortunately become a threat globally. The CBUAE launched numerous fintech initiatives, which include the mBridge Platform to improve processing cross-border fund transfers, the National Payment System Strategy (NPSS) to modernise the payments infrastructure, a SME funding platform, and the Financial Services Cloud Infrastructure, with the objective of making the UAE a centre of excellence in MENA financial cloud services. These measures are designed to put the UAE at the forefront of jurisdictions offering the most secure, advanced and innovative digital banking services in the world. The CBUAE takes its AML/CFT responsibilities seriously, developing our policies, systems and processes accordingly. We have created the required AML/CFT infrastructure, in coordination with the National Committee, to ensure that we provide safe and transparent financial services in the UAE. We will continue to work closely with FATF and other international bodies in the fight against money laundering and terrorist funding. I would like to offer my sincere thanks to the Board of Directors, CBUAE employees and all our associates for their tireless efforts in bringing these projects to fruition. Together, we readied the organisation to achieve its goals of providing monetary and financial stability to the UAE and becoming one of the world’s top central banks. Our mission at the CBUAE in 2022 is clear and focused. We aim to enhance monetary management and financial stability, and to protect consumers through effective supervision of licensed financial institutions, prudent management of reserves, robust financial infrastructure and the adoption of digital technologies. We enter 2022 with enthusiasm and the firm commitment to become one of the world’s top central banks. We face the future with confidence, well-equipped to deliver our vision and mission for the nation over the next 50 years. 7
9. Central Bank of the UAE ANNUAL REPORT 2021 THE CBUAE AT A GLANCE OUR VISION To be among the top central banks globally in promoting monetary and financial stability , to support the UAE’s competitiveness. OUR MISSION Enhancing monetary management, financial stability, and protecting consumers through ● effective supervision of licensed financial institutions; ● prudent management of reserves; ● robust financial infrastructure; and ● the adoption of digital technologies. OUR VALUES Being competitive Our ambition is to be a global leader across various fields by investing in innovative technology, grounded in best practice and research. Being Proactive Establishing a proactive mindset that increases ownership, accountability, and innovation through empowering and enabling employees across all levels and facilitating effective decision making. Being Transparent Creating transparency and openness with the highest integrity across the organisation through effective communication and collaboration. Being Talent-centric Building a caring, talent-centric organisation that rewards and recognises employees and emphasises their development. 8 9
10. Central Bank of the UAE ANNUAL REPORT 2021 HIGHLIGHTS OF OUR HISTORY 2000 1973 The ‘Currency Board’ was established, as per Union Law No. (2) of 1973 The Currency Board issued the national currency that replaced the Bahraini Dinar and the Qatar and Dubai Riyal, currencies that were in use at the time with the UAE Dirham 1980 The Union Law No (10) of 1980 established the CBUAE as a public institution, and augmented the CBUAE’s functions (previously assigned to the Currency Board). H.E. Abdul Malik Yousef Al Hamar appointed Governor 10 1982 Formation of the National Anti Money Laundering Committee Formation of the Risk Bureau 2012 1991 H.E. Sultan Bin Nasser Al Suwaidi appointed Governor 1998 Establishment of the Anti Money Laundering and Suspicious Case Unit, the UAE’s Financial Intelligence Unit CBUAE publishes its first Financial Stability Report 2014 2020 H.E. Abdulhamid M. Saeed Alahmadi appointed Governor 2021 H.E. Mubarak Rashed Al Mansoori appointed Governor H.E. Khaled Mohamed Balama appointed Governor 2018 Merger of Insurance Authority into the CBUAE pursuant to Decretal Federal Law No. (25) of 2020 Issue of Decretal Federal Law No. (14) of 2018 regarding the Central Bank & Organisation of Financial Institutions and Activities 11
11. Central Bank of the UAE ANNUAL REPORT 2021 BOARD LEVEL COMMITTEES BOARD RISK COMMITTEE AUDIT COMMITTEE The Board Risk Committee is responsible for risk management frameworks (including definition of risk categories, e.g. financial, operational and business continuity risks, information security, legal and compliance risk associated with all CBUAE departments, risk measurement, appetite and limits definition, and risk management policies). It is also tasked to monitor and review the continued improvement of the CBUAE’s information security, in addition to the overall risk management practices and processes across the CBUAE, and making relevant recommendations to the Board. The Audit Committee is responsible for monitoring the integrity of the CBUAE’s financial statements, assessing the integrity of its financial reporting and disclosure processes, and reviewing and recommending the external auditor’s terms of engagement, selection, appointment and fees. It also oversees the CBUAE’s internal audit function. EXECUTIVE LEVEL COMMITTEES HUMAN RESOURCES COMMITTEE The Human Resources Committee is responsible for reviewing the CBUAE’s organisational structure and HR policies, approving the selection criteria for Heads of Department, and recommending any required changes to the Board. FINANCIAL STABILITY POLICY COMMITTEE (FSC) SUPERVISORY AND REGULATORY COMMITTEE (SRC) The FSC’s mandate is to identify threats to financial stability through active macrosurveillance of market activities, and to act to mitigate systemic risk by proposing macroprudential policies and crisis management measures for the banking and insurance sectors, in line with the relevant Boardapproved framework. The SRC mandate is to supervise the safety and soundness of financial institutions licensed by the CBUAE by proposing and implementing prudential, conduct and AML regulations, consumer protection and market conduct measures, and oversight of payment systems, and proposing enforcement action. MONETARY AND RESERVE MANAGEMENT COMMITTEE (MRMC) The MRMC mandate is to fulfil the CBUAE’s goals for monetary stability through the design and use of monetary management tools, and reserve management, by proposing investment guidelines and optimising tactical reserve asset allocations. 12 EXECUTIVE AND STRATEGY COMMITTEE (ESC) The ESC mandate is to decide on all operational matters within its remit related to operations and support functions to ensure efficient and effective use of the CBUAE resources. It also serves as the Governor’s forum to discuss general CBUAE steering matters with the senior management team. ESC is also charged with monitoring and steering implementation of the CBUAE transformation plan, and with reviewing and approving the CBUAE’s digital innovation and FinTech initiatives. RISK AND COMPLIANCE POLICY COMMITTEE (RCPC) The RCPC mandate is to recommend a holistic enterprise risk management framework to the Board Risk Committee, and implement policies and processes to maintain adequate and effective risk management across the CBUAE. It is also charged with ensuring compliance with all internal and external policies, rules and regulations applicable to the CBUAE. FINANCIAL CRISIS PREPAREDNESS AND MANAGEMENT COMMITTEE (FCPMC) The FCPMC mandate is to respond to the risk of systemic financial distress. It coordinates the CBUAE’s response and financial crisis management measures, with the objective to ensure that severe issues affecting the financial system are addressed effectively. 13
12. Central Bank of the UAE ANNUAL REPORT 2021 ECONOMIC AND FINANCIAL MARKETS DEVELOPMENTS 01 CHAPTER 1 INTERNATIONAL ECONOMIC DEVELOPMENTS The global economy returned to positive growth in 2021 , owing to exceptional public policy support, the provision and administering of vaccines and the general easing of restrictions on economic activities and travel. This had a positive impact on the growth outlook for the UAE’s open economy. Meanwhile, inflation rose well above target in advanced economies, due to increasing demand in the face of persistent disruptions to the global value chains and soaring energy prices. As a result, monetary policy tightening is expected to lead to higher interest rates in the UAE. 14 15
13. Central Bank of the UAE Bahrain -5 .1 2.4 Advanced Economies -4.5 5.0 Kuwait -8.9 1.0 USA 1.2.2GCC COUNTRIES -3.4 5.7 Oman -2.8 2.5 Eurozone -6.3 5.2 Qatar -3.6 1.9 France* -8.0 7.0 UAE* -4.8 3.8 Germany* -4.6 2.7 Saudi Arabia -4.1 2.8 United Kingdom* -9.8 7.5 Average CPI inflation turned positive in all GCC countries in 2021 (Table 1.3),and was the highest in Saudi Arabia and Kuwait (3.2% in both), due to the spill-over from high international oil and natural gas prices on local prices and the uptick in demand. Meanwhile, the UAE had the lowest inflation rate. Japan -4.6 1.6 EMDEs* -2.1 6.8 China* 2.3 8.1 India* -7.3 9.2 MECA -2.8 4.2 Source: IMF, World Economic Outlook, January 2022 for World, Advanced economies, EMDEs (Emerging and Developing Economies) and MECA (Middle East and Central Asia). * National statistics authorities for the individual countries. For India it is based on RBI’s estimates for fiscal years 2020-2021 and 2021-2022. 1.1.2 EMERGING AND DEVELOPING ECONOMIES Emerging and Developing Economies (EMDEs) were estimated to have grown by 6.8%, boosted by large economies such as China (8.1% growth) and India (9.2% growth). However, many developing countries recorded sluggish growth in 2021 due to the abovementioned trading and economic difficulties. Source: IMF, World Economic Outlook database, October 2021 estimates. * FCSC. Table.1.3. Annual Average CPI in GCC Countries (%) 1.2 INFLATION 1.2.1ADVANCED ECONOMIES Headline inflation rose rapidly in advanced economies to above target, triggered by higher energy prices and remaining supply constraints. In the U.S., for example, the stimulus checks, solid job gains and pent-up demand played a role in sustaining inflation, which appeared to be less transitory than initially believed1. 2020 2021 Bahrain -2.3 1.0 Kuwait 2.1 3.2 Oman -0.9 3.0 Qatar -2.7 2.5 UAE* -2.1 0.2 Saudi Arabia 3.4 3.2 Source: IMF, World Economic Outlook, October 2021. * Source: FCSC Figure 1.1. Annual CPI Inflation in Selected Economies (%) 7 6 5 4 3 2 1 Like other primary commodity exporters, the GCC states benefitted from higher hydrocarbon revenues in 2021, which further expanded the available fiscal space, thereby supporting the growth momentum. The UAE had the highest growth among the GCC states (Table 1.2). 0 -1 -2 2020 China 1.1.3 GCC COUNTRIES India The U.K. real growth reached 7.5%, owing among other factors to base effect, as the economy contracted by 9.8% in the previous year. Its GDP growth slowed down in the second half of the year, however, due to weaker consumer spending and business investment. 5.9 France The Eurozone grew by 5.2% during the year. The lower growth (compared to the U.S.) was mainly due to the fact that services were more affected and supply chain disruptions were more pronounced in Europe. -3.1 In most EMDEs, inflation picked up for the same reasons as in the AEs, in addition to currency depreciation, which led in some cases to a surge in imported inflation. 2021 Germany The 5.7% growth that the U.S. managed to achieve is due to the large fiscal stimulus brought in by the Biden administration, estimated at USD 2.5 trillion, or 11% of GDP in 2021, in tandem with progress on vaccinations and an end to lockdowns. As a result, the unemployment rate declined from 6.7% in December 2020 to 3.9% at the end of 2021. World Output Emerging and Developing Economies 2020 Euroarea Advanced Economies (AE) managed to support the recovery underway, with sizeable fiscal and monetary support and robust vaccination campaigns, resulting in 5.0% real GDP growth during 2021. 2021 UK 1.1.1 ADVANCED ECONOMIES 2020 Table.1.2. Real GDP Growth in the GCC Countries (%) Japan According to the IMF, the global economy witnessed a return to positive growth of 5.9% in 2021, owing to base effect (-3.1% growth in 2020), the reopening of contact-intensive activities that were severely affected by lockdowns in the previous year, and partial return of international travel. Nonetheless, global growth remained constrained by persistent supply disruptions and labour shortages in developed economies, but unemployment decreased markedly. Observers also noted rising uncertainties related to new variants of the virus, sharper than expected monetary tightening and regional tensions, which all could affect the economic outlook. Table.1.1. Real GDP Growth in Selected Countries/Groups (%) US 1.1 GLOBAL GROWTH ANNUAL REPORT 2021 2021 Source: World Economic Outlook Database, October 2021. 1 US CPI inflation reached 7.9% Y-o-Y on February 2022 and 6.4% when food and energy prices are excluded 16 17
14. Central Bank of the UAE ANNUAL REPORT 2021 International Monetary Fund . (January 2022), World Economic Outlook. 60 50 40 3.50 4.40 30 3.00 4.30 20 2.50 4.20 Source: US Energy Information Administration (EIA) and Bloomberg Dec-21 3.50 Jul-21 3.60 -0.50 Sep-21 3.70 0.00 May-21 Crude Brent Price-Dollars per Barrel (RHS) 3.80 0.50 Mar-21 Copper Prices (in dollar per tons) 3.90 1.00 Jan-21 Aluminium Prices (in dollar per tons) 4.00 1.50 Nov-20 0 Dec-2021 0 4.10 2.00 Jul-20 10 Sep-20 2000 Figure 1.3. Policy Rates in Selected Economies (%) May-20 4000 The Bank of England was a notable exception in this regard. It decided at its meeting on 15 December 2021 to raise its policy rate from 0.10% to 0.25%, in an effort to counter soaring inflationary pressure and meet its 2% inflation target. Mar-20 6000 Similarly, the ECB put on hold the increase in policy rates, stating that monetary accommodation is still needed, in tandem with a step-by-step reduction in the pace of its asset purchases over the coming period. Jan-20 8000 Oct-2021 Choi, Sangyup, Davide Furceri, Prakash Loungani, Saurabh Mishra, Marcos Poplawski-Ribeiro. (2017),“Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies”. IMF Working Paper WP/17/196. 70 Aug-2021 A significant determinant of inflation, housing prices are increasing sharply worldwide. In advanced economies, its causes include a noticeable decline in household consumption due to confinement measures, which led to an increase in savings. The uncertainty surrounding capital markets and firms’ profitability led savers to look at real estate investment opportunities. In addition, very low Central Bank interest rates – a 80 10000 Jun-2021 SHARPLY INCREASED HOUSING PRICES Christopher J Waller. (March 24, 2022), The red hot housing market – the role of policy and implications for housing affordability. Board of Governors of the Federal Reserve System. 90 12000 Apr-2021 Bureau of Labor Statistics. (January 14, 2022), The Economics Daily. Consumer Price Index: 2021 in review. Figure 1.2. Commodity Prices Feb-2021 References: Finally, with regard to gold prices, the expected increase in interest rates made investment in the yellow metal less attractive, thereby leading to a decline in prices from USD 1894 per oz. at the end of 2020 to USD 1834 per oz. at the end of 2021. Oct-2020 Households delayed their planned consumption during the confinement. As economic activities reopened, demand surged to higher than usual levels (low base effect) to recover previously unattended purchases, with households over-purchasing some goods in anticipation of potential new lockdowns. This demand surge increases inflation, especially given the supply disruption. In its January 2022 World Economic Outlook, the IMF projects that inflation would decrease gradually as supplydemand imbalances wane. Spikes in the cost of oil, gas and other energy sources led to higher production and transport costs, which contributed (directly and indirectly) to higher inflation. Yet, energy price increases are often transitory, subject to political and weather-related factors that are unpredictable by their nature. An IMF study of emerging and advanced economies in 2017 showed that the impact of oil price shocks on inflation worldwide has declined over time, due largely to better conduct of monetary policy. According to that study, a 10 percent increase in global oil prices caused an average rise in domestic inflation of only 0.4 percentage points, with the effect vanishing after two years. Meanwhile, natural gas prices increased from 2.6 MMBtu in December 2020, reaching a peak of 5.5 MMBtu in October 2021, before declining to 3.8 MMBtu in December 2021. The price of constructionrelated commodities such as aluminium and steel remained high during this period (Figure 1.2.) Dec-2020 REBOUND IN DEMAND HIGHER ENERGY COSTS Major central banks such as the Federal Reserve System (The Fed), the ECB, the Bank of Japan and the People’s Bank of China kept interest rates on hold during 2021. Nonetheless, in the face of rising inflation, the Fed’s Open Market Committee announced at its 15 December 2021 meeting that it had decided to reduce the monthly pace of its net asset purchases by USD 20 billion for Treasury securities and USD 10 billion for agency mortgagebacked securities.2 Fed officials also signalled that the increase in interest rates will most probably start in March 2022, with markets expecting four to six additional increases before the year-end. Aug-2020 Global value chains were disrupted by policies introduced to fight the spread of COVID-19; including lockdowns, confinements, transportation delays and reduced access to manufacturing facilities. These factors made the inputs of many products scarcer, and therefore more costly. According to the US Bureau of Labor Statistics, about half of current inflation in the U.S. is due to pandemic-related supply problems. As the production cost increase, so does overall inflation. The price of Brent crude oil increased from USD 49.9 per barrel in December 2020 to USD 74.2 per barrel at the end of December 2021, and there was a recovery in economic activity and moderation in COVID-19 impact. Jun-2020 SUPPLY BOTTLENECKS measure to counter the pandemic-induced recession, creating low interest rates for savers - contributed to a surge in the demand for housing purchases as an alternative investment. The lockdown measures also prevented contractors from fulfilling the house market’s supply requirements. These factors led to higher housing prices and rents, thus increasing inflation. 1.4 MONETARY POLICY Apr-2020 Inflation is increasing worldwide, affecting advanced and emerging economies alike. The main drivers of inflation include: 1.3 COMMODITY PRICES Feb-2020 ONGOING DRIVERS OF GLOBAL INFLATION Euro Area US UK Japan Australia Saudi Arabia Korea China (RHS) Source: BIS Statistics Federal Reserve Bank of Dallas. (November 2021), Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23”. Working Paper 2116. 2 P  ress release available online: https://www.federalreserve.gov/newsevents/pressreleases/monetary20211215a.htm. 18 19
15. Central Bank of the UAE ANNUAL REPORT 2021 ECONOMIC AND FINANCIAL MARKETS DEVELOPMENTS 01 CHAPTER 2 THE UAE EXTERNAL SECTOR The current account surplus of the balance of payments increased due to a surge in both oil and non-oil exports, in addition to a higher surplus in the balance of services as a result of the resumption of transportation and travel. 20 21
16. Central Bank of the UAE ANNUAL REPORT 2021 I . UAE MAJOR TRADING PARTNERS Table 2.2. UAE Major Import Partners Millions of Dirhams Available data up to September 2021 show the total value of UAE trade (non-oil exports, re-exports and total imports) at AED 1.29 trillion. The main non-oil export partners of the UAE were India, Saudi Arabia, Switzerland and Hong Kong. India Saudi Arabia Switzerland Hong Kong' SAR 18,668 26,918 12,643 2021 Value Share (%) India 45,326 7.90 54,733 7.70 USA 46,929 8.20 42,217 5.90 The UAE current account surplus is estimated to have increased from AED 77.5 billion in 2020 to AED 176.2 billion in 2021 (11.8% of GDP). This was mainly driven by the surplus of the trade balance and the surplus in the balance of services.. Millions of Dirhams Japan 25,851 4.50 28,988 4.10 2021 Value Share (%) Figure 2.1. UAE Current Account Balance Turkey 7,037 1.20 26,088 3.70 Mali 3,601 0.60 24,251 3.40 Germany 19,947 3.50 23,134 3.20 Vietnam 15,774 2.80 21,341 3.00 Italy 14,640 2.60 20,605 2.90 6.70 10.10 14.60 6.90 36,366 29,203 20,101 18,972 14.70 11.80 8.10 17.90 133,730 18.70 Billion Dirhams 400 300 7.70 Saudi Arabia 17,228 3.00 19,461 2.70 Oman 8,247 4.50 11,445 4.60 298,605 52.20 394,548 55.30 Kuwait 5,011 2.70 9,563 3.90 Grand Total 572,888 100 714,262 100 China 6,445 3.50 8,464 3.40 Turkey 14,619 7.90 8,007 3.20 USA 4,270 2.30 77,120 3.10 Italy 11,367 6.20 6,430 2.60 120,465 65.40 156,260 63.10 Grand Total 191,322 100 247,923 100 Billions of Dirhams 300 200 100 2018 2019 2020 2021 Gas Exports 100 Crude Oil Exports Petroleum Products Exports Total Exports of Hydrocarbon -100 -200 Hydrocarbon exports are estimated to have increased by 41.1% in 2021, due to the increase in the price of crude oil and other products. 0 200 0 Top 10 Total Top 10 Total The overall balance of payments shifted from a deficit of AED 13.1 billion in 2020 to a surplus of AED 85.0 billion in 2021, which is reflected in the increase in CBUAE official reserves. 102,273 2020 Value Share (%) 12,278 2020 Value Share (%) Figure 2.2. UAE Hydrocarbon Exports China Table 2.1. Major UAE Non-Oil Export Partners Countries Countries II. BALANCE OF PAYMENTS Source: CBUAE, Data and Statistics Centre 2018 2019 2020 2021 Services Transfers Data for the first 3 quarters of 2020 and 2021 Source: FCSC Trade Balance Current Account Balance Source: CBUAE, Data and Statistics Centre Data for the first 3 quarters of 2020 and 2021 Source: FCSC On the receiving side, the UAE imported most from China in 2021, followed by India, the United States and Japan. 22 23
17. Central Bank of the UAE ANNUAL REPORT 2021 Non-hydrocarbon exports rose by 5 .2%, reaching AED 415.0 billion or 27.8% of GDP, while re-exports rose by 15.3%. Figure 2.3. UAE Trade Balance Billions of Dirhams 1200.0 1000.0 Corresponding to the current account surplus, the financial account deficit decreased slightly to AED 96.8 billion. The financial outflows during 2021 were mainly conducted by banks’ investments in securities, and other private and public sector entities. The average Nominal Effective Exchange Rate (NEER) of the UAE Dirham3 depreciated by 2.3% Y-o-Y in 2021. Figure 2.5. Nominal and Real Effective Exchange Rates (Y-o-Y, %) 0.06 Figure 2.4. UAE Financial Account Balance Billion Dirhams 0 III. THE EXCHANGE RATE 0.04 0.02 800.0 0 600.0 -50 -0.02 400.0 -0.04 -100 -0.08 Source: CBUAE, Data and Statistics Centre. Given the role of the UAE as a travel and transportation hub, the resumption of these activities led to an increase in both imports and exports of these services. The sub-accounts of travel and transport items represented together 72.8% of inflows and 46.1% of outflows related to the balance of services. In 2021, travel recorded a net inflow of AED 40.2 billion, while transport recorded a net inflow of AED 45.1 billion, owing mostly to the ease in global supply chain disruptions. Dec-21 Nov-21 Oct-21 Sep-21 Aug-21 Jul-21 June-21 May-21 Enterprises of Public Sector Apr-21 Private Capital -0.1 Mar-21 2021 Feb-21 2020 Jan-21 Trade Balance (FOB) 2019 Dec-20 Exports of Non-Hydrocarbon 2018 Nov-20 -150 Total Imports (CIF ) Oct-20 2021 Sep-20 2020 Aug-20 2019 Jul-20 2018 June-20 2017 May-20 2016 Apr-20 2015 Mar-20 2014 Feb-20 0.0 -0.06 Jan-20 200.0 Financial Account Source: CBUAE, Data and Statistics Centre It is worth noting that despite the unfavourable international environment, inward FDI to the UAE increased by 4.1% in 2021 to AED 75.9 billion. Outward personal remittances increased by 11.4%, or AED 17.8 billion in 2021, reaching AED 174.6 billion. The top two countries for outward personal remittances were India and Pakistan accounting for 28.0% and 11.9% respectively. Personal remittances declined in 2021 by 15.3% to India, while they increased by 3% in Pakistan. NEER REER Source: BIS, Statistics In real terms, i.e., after adjusting for the inflation differential between the UAE and its main trade partners, the average Real Effective Exchange Rate (REER) of the UAE Dirham depreciated by 4.9% Y-o-Y in 2021, as a result of lower inflation in the UAE compared to projected main trading partners. 3 NEER takes into account the bilateral exchange rates of the UAE’s trading partners. 24 25
18. Central Bank of the UAE ECONOMIC AND FINANCIAL MARKETS DEVELOPMENTS 01 ANNUAL REPORT 2021 CHAPTER 3 DOMESTIC ECONOMIC DEVELOPMENTS Economic activity in the UAE recorded positive growth in 2021 boosted by an accommodating monetary stance, fiscal and other support initiatives, and global economic recovery. The real estate market in both, Abu Dhabi and Dubai, recorded yearly price increase in the latter part of the year. Headline CPI inflation rate turned slightly positive, for the first time since 2018. 26 27
19. Central Bank of the UAE ANNUAL REPORT 2021 3 .1 ECONOMIC GROWTH Growth in the real non-oil GDP moved into positive territory in 2021 as a result of the recovery in local and global demand, while the country continued to be a leader in containing the spread of the coronavirus. Table 3.1. Annual Real GDP Growth Rates in the UAE (%) 2019 2020 2021 The average UAE PMI increased by 9.2% Y-o-Y in 2021, reaching 55.6 in December 2021 (53.1 annual average). The increase in PMI was partly driven by Expo 2020 Dubai, which boosted travel and spending and strong growth in new business orders. 3.0 2.9 5% 2.8 0% 2.7 2.6 -5% 52 -10% 2.5 4.3 3.9 46 UAE Crude Oil Production Growth (%, Y-o-Y) Oil GDP 2.6 44 Oil Production (mb/d) (RHS) 42 2.4 Dec-21 Nov-21 Oct-21 Sep-21 Aug-21 Jul-21 June-21 Source: OPEC, Monthly Oil Market Reports May-21 40 Apr-21 5.0 Mar-21 8.0 Feb-21 -0.1 Jan-21 -6.1 2021 5.3 2020 -4.3 2019 3.8 48 2018 Non-oil GDP 2017 50 2016 4.2 2015 5.4 2014 3.8 2013 -4.8 2012 3.4 2011 Overall GDP Data captured by the CBUAE Wage Protection System (WPS)5 for employment and average salary in 2021 show a recovery from the previous year, which witnessed job cuts. UAE PMI Threshold level Source: IHS Markit Tourism and hospitality picked up in the UAE as lockdowns eased and confidence in health safety rules improved. Available data for Dubai show a recovery in hotel occupancy from an average of 54% in 2020 to 67% in 2021, which remains below prepandemic levels. Meanwhile, the Oxford Stringency Index6 decreased from a peak of 90 in 2020 to an average of 53 in 2021. The index also reached 39 in the third quarter of 2021, before increasing to 52 by the end of the year, due to the Omicron variant. The 2021 index figures are lower than the previous year because of the gradual reopening of the economy, which will have a positive impact on the UAE, given its role as a regional trade, transportation and tourism hub. As a result, real non-oil GDP grew by 5.3% in 2021 compared to a decline by 4.3% in 2020. 28 3.1 56 54 The residential real estate market improved in 2021, with sales prices in Abu Dhabi and Dubai registering Y-o-Y gains in December of 1.8% and 12.6% , respectively. 6 3.2 10% 58 2023 F The UAE retained its top position globally – held since the beginning of the pandemic – in the number of tests and administration of COVID-19 vaccines per capita, with 111.7 million tests and 22.6 million vaccines rolled out by the end of 2021. As per FSCS, over 1.1 million tests were performed per 100,000 population and 229 vaccines administered per 100 people, with 92% of the eligible population being fully vaccinated and 100% receiving at least one dose.4 5 15% Figure 3.1. UAE PMI5 2022 F Source: FCSC for 2019-2021, and CBUAE forecasts for 2022 and 2023. 4 Figure 3.2. Average UAE Crude Oil Production (in mb/d) Source: FCSC. This includes employees registered under the Ministry of Human Resources and Emiratisation, Jebel Ali Free Zone Authority and some who are employed by licensed financial institutions, where the labour-related authority does not participate in the WPS. A measure, produced by the University of Oxford, between 0 and 100, indicating the level of closure, due to restrictions, aiming to reduce the spread of COVID-19. The real oil GDP growth, after a drop by 6.1% in 2020, remained almost flat at -0.1% in 2021, corresponding to an average oil production of 2.72 mb/d for the year as a whole. Therefore, the overall real GDP grew by 3.8% during 2021. For 2022, the CBUAE revised its projections to 5.4% of overall real GDP growth, with the non-oil real GDP expected to increase by 4.3%, owing to sustained public spending, a positive outlook for credit growth, higher employment and better business sentiment, and Expo 2020 Dubai as it continues throughout the first quarter of the year, in addition to the positive spillover from the FIFA Worldcup 2022 in Qatar. Meanwhile, real oil GDP growth is projected to reach 8.0%, owing to the expected recovery in global demand, the pickup in transportation and travel and increase in production of OPEC+ members, as a result of sanctions on Russia. Downside risks in 2022 reflect concerns about new variants of COVID-19, the limited access to vaccines in developing economies, war in Ukraine and geopolitical tensions elsewhere. All forecasts remain subject to revisions due to the high level of uncertainties. 7 3.2 DEVELOPMENTS IN THE RESIDENTIAL REAL ESTATE MARKET Prices of residential real estate recorded Y-o-Y gains in the latter part of 2021. This was the result of recovering demand, including from abroad as the UAE maintained its safe haven status for tourism and real estate investment. Dubai Residential Market According to recent data from Dubai Land Department (DLD)7, the residential property prices in Dubai increased by 12.6% Y-o-Y in December 2021, while rents declined by 2.6% Y-o-Y over the same period of time. Figure 3.3. Average Dubai Residential Unit Sale Prices Dirhams 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 1,000,000 950,000 900,000 850,000 800,000 2016 2017 2018 2019 2020 2021 Source: Dubai Land Department Note: All data are as of December of the corresponding year. D  ata from DLD remain subject to revisions. 29
20. Central Bank of the UAE ANNUAL REPORT 2021 Abu Dhabi Residential Market According to the REIDIN house price index , the price per square meter in the Abu Dhabi housing market increased in December 2021 by 1.8% Y-o-Y, while 17,000 making monthly Y-o-Y gains for all months of the year, except January. However, rents dropped by 0.8% Y-o-Y in December 2021. Figure 3.4. Abu Dhabi Residential Prices Dirhams per SQM 13,000 3.3 INFLATION Average headline CPI inflation left negative territory and recorded a 0.2% increase in 2021, boosted by an increase in transportation, and recreation and culture component prices, while inflation in housing as well as textiles, clothing and footwear remained negative. Table 3.2. CPI Inflation (Y-o-Y, %) Components Weight 2020 2021 100.0 -2.1 0.2 14.3 3.7 0.0 Beverages and tobacco 0.3 5.9 0.0 Textiles, clothing and footwear 3.2 4.8 -3.3 34.1 -3.7 -3.5 Headline Inflation Food and soft drinks 9,000 Housing, Water, Electricity, and Gas 5,000 2016 2017 2018 2019 2020 2021 Source: REIDIN Data Base Note: All data are as of December of the corresponding year. 5.6 -2.6 0.4 Medical care 1.4 0.0 0.4 14.6 -5.8 8.9 Communications 5.4 -0.1 0.1 Recreation and culture 3.2 -16.7 3.1 Education The continued drop in the housing component prices (34% weight in the consumer basket) by 3.5% was the main driver of the drop in non-tradables inflation during 2021. Except for the price of miscellaneous goods and services, inflation of all other nontradables was positive during the year. Figure 3.5. Headline, Tradable and NonTradable Inflation (Y-o-Y, %) in the UAE 8% Furniture and household goods Transportation Non-tradables i.e., goods and services that are not traded across borders where prices are mainly determined by domestic supply and demand conditions, showed a fall by 0.5% in their price. Tradables prices8, which account for 34% of the CPI consumption basket, rose by 1.4% in 2021 due to the broad-based increase in prices, except for food and soft drinks, textiles, clothing and footwear, and miscellaneous goods and services. The spike in oil prices of more than 69% during the year put pressure on transportation costs, which rose by 8.9%, the highest among the components of the tradables basket. 7.7 Restaurants and hotels 4.0 Miscellaneous goods and services 6.3 0.9 0.1 1.0 0.7 Source: FCSC -1.3 Government revenues increased in the first three quarters of 2021, the latest period for which data are available, due to the pick-up in economic activity. Meanwhile, total current expenditure rose in support of the recovery. The overall surplus increased almost four-fold due to higher increase in revenues compared to expenditure. 3.4.1 REVENUES Government revenues increased Y-o-Y in the first nine months of 2021 by 17.4% to AED 334.6 billion due to an increase in taxes and other revenues. Figure 3.6. General Government Revenues Billions of Dirhams 400 350 6% 300 4% 250 2% 200 0% 150 -2% 100 -4% 50 Tradables -0.9 3.4 THE CONSOLIDATED GOVERNMENT FINANCES Non-Tradables Source: FCSC and CBUAE calculations Headline Inflation 0 Q1-Q3 2019 Q1-Q3 2020 Q1-Q3 2021 Taxes Social contributions Other revenues Source: UAE Ministry of Finance 8 30  s per CBUAE calculations, tradables include the following categories of goods and services: food and soft drinks; beverages and A tobacco; textiles, clothing and footwear; furniture and household goods; transportation; and miscellaneous goods and services. 31
21. Central Bank of the UAE ANNUAL REPORT 2021 3 .4.2 EXPENDITURE Current expenditure rose Y-o-Y by 9.8% in Q1-Q3 2021, standing at AED 257.0 billion, in contrast to a decline by 20.1% during the same period of the previous year. The increase in expenses can be attributed to higher spending on goods and services. Meanwhile, capital spending, measured by the net acquisition of non-financial assets, decreased Y-o-Y by 59.9% in the year-to-September 2021, reaching AED 13.6 billion. Figure 3.7. General Government Expenses As a result, the consolidated fiscal balance recorded a surplus of AED 64.0 billion, compared to AED 17.1 billion during the same period in 2020. Figure 3.8. Fiscal Stance Billions of Dirhams 370 60 350 50 330 40 310 30 400 290 20 270 10 200 250 0 Q1-Q3 2019 Q1-Q3 2020 100 Revenues Expenditure Surplus (+)/Deficit(-) (RHS) 0 Q1-Q3 2019 Q1-Q3 2020 Compensation of employees Use of goods and services Subsidies Social benefits Other expenses Source: UAE Ministry of Finance Q1-Q3 2021 Billions of Dirhams 2020 Billions of Dirhams 300 Table 3.3. UAE Consolidated Government Finances Source: UAE Ministry of Finance Q1-Q3 2021 2021 2020 2021 Q1-Q3 Q1-Q3 2020 2021 Q1-Q3 Q1-Q3 (Y-o-Y, %) (Y-o-Y, %) Q1 Q2 Q3 Q4 Q1 Q2 Q3 (a) Revenues 121.7 84.0 79.4 85.5 89.0 119.4 126.3 285.0 334.6 -20.6 17.4 Taxes 57.2 28.5 27.6 36.2 37.6 46.9 53.4 113.4 138.0 -32.0 21.7 3.3 3.1 3.1 3.2 3.7 1.7 3.4 9.5 8.8 159.0 -7.0 Other revenues 61.1 52.4 48.7 46.1 47.7 70.7 69.5 162.2 187.8 -14.1 15.8 (b) Expenditure (c+d) 92.9 90.5 84.6 135.7 77.8 101.0 91.8 267.9 270.6 -18.0 1.0 (c) Current expenditure 80.8 80.9 72.2 119.3 73.1 96.6 87.3 233.9 257.0 -20.1 9.8 Compensation of employees 29.0 28.0 28.0 24.3 24.6 32.1 28.1 85.0 84.9 5.0 -0.1 Use of goods and services 20.0 20.4 17.8 43.6 22.6 32.8 34.5 58.1 89.9 -32.9 54.6 Consumption of fixed capital 1.1 1.2 1.2 2.2 1.2 1.9 1.3 3.5 4.5 -2.3 26.6 Interest 1.3 1.4 1.2 2.5 2.0 1.7 2.0 3.9 5.7 25.7 44.8 Subsidies 5.9 15.7 8.5 10.3 6.7 7.9 8.1 30.1 22.7 45.2 -24.8 Grants 0.3 0.2 0.1 3.3 0.1 0.3 0.4 0.5 0.8 -96.3 43.7 Social benefits 16.8 13.0 12.6 22.4 13.1 15.7 10.6 42.4 39.4 -25.9 -6.9 Other expenses 6.4 1.1 2.9 10.8 2.8 4.2 2.1 10.4 9.2 -59.9 -10.9 (d) Investment in non-financial assets (Capital expenditure) 12.1 9.5 12.3 16.4 4.8 4.4 4.5 34.0 13.6 0.5 -59.9 Net Operating Balance (a-c) 40.9 3.1 7.1 -33.7 15.9 22.7 39.0 51.1 77.6 -22.9 51.9 Net Lending/ Borrowing (Surplus (+)/ Deficit(-)) (a-b) 28.8 -6.5 -5.2 -50.1 11.1 18.4 34.5 17.1 64.0 -47.3 274.0 Social contributions Source: UAE Ministry of Finance Note: ● Revenues do not include ADNOC transfers and government investment income. ● Other revenues cover: property income (interest, dividends, rent), sales of goods and services (including administrative fees), fines and penalties, and other revenues not elsewhere classified. ● Effective Q1 2016, the Emirate of Abu Dhabi has added some transfers of important investment authorities from financing accounts to revenues, included in the distributed profit computation. ● Other expenses include the payments Abu Dhabi made on behalf of the UAE federal government. ● Subsidies include transfers to publicly-owned corporations and GREs. ● Grants include current or capital transfers from the government to other government units, international organisations and foreign governments, excluding transfers between federal and local governments. ● Data for 2020 have been amended compared to those previously reported by the CBUAE, based on revisions made by the UAE Ministry of Finance. 32 33
22. Central Bank of the UAE ANNUAL REPORT 2021 ECONOMIC AND FINANCIAL MARKET DEVELOPMENTS 01 CHAPTER 4 FINANCIAL MARKET DEVELOPMENTS Monetary aggregates grew during 2021 due to the rise in resident deposits. The spread between EIBOR and the USD LIBOR remained in a narrow band. The banking sector’s financial soundness indicators remained healthy. The insurance sector retained its growth momentum, with increasing Gross Written Premiums (GWP), investments, assets and equity. 34 35
23. Central Bank of the UAE ANNUAL REPORT 2021 4 .1 MONEY SUPPLY 4.2 INTEREST RATES The monetary aggregate M39 increased during 2021 by 4.9% (AED 87.4 billion) to reach AED 1,856.7 billion, as a result of an increase in the components M1, M2, and Government Deposits at both banks and the Central Bank. The latter (16.4% of M3) grew by 1.0%, reaching AED 293.6 billion. 4.2.1 SHORT-TERM INTEREST RATE 1 The 10-year swap rate on the Dirham12 increased from 1.8% in the last week of December 2020 to 2.1% in the last week of December 2021. 0 -0.5 Billion Dirhams Currency Issued LIBOR-USD LIBOR-GBP LIBOR-EUR Nov-2021 Sep-2021 Jul-2021 Mar-2021 EIBOR May-2021 Jan-2021 Nov-2020 Sep-2020 Jul-2020 May-2020 Figure 4.4. 10-year Interest Swap Rates (%) Mar-2020 Figure 4.1. Monetary aggregates in 2021 (Y-o-Y Change) -1 Monetary Deposits M1 (Y-o-Y, % change) 1 -10 0 10 20 30 40 50 Source: CBUAE, Data and Statistics Centre M  2 + Government Deposits at banks and CBUAE. M  1 + Quasi-Monetary Deposits. 11 M  1 + Quasi-Monetary Deposits. 9 10 36 Private Sector 0.5 (Y-o-Y, % change) 0 US SWAP 10 year Source: Bloomberg Note: Based on average monthly data M3 60 70 80 Resident Deposits GREs 1.5 AED SWAP 10 year Government Deposits (Y-o-Y, % change) (Y-o-Y, % change) 2 Quasi- Monetary Deposits M2 Bank Deposits Government Sector 2.5 Source: Bloomberg Note: Based on average monthly data The spread of 3-month EIBOR vis-à-vis 3-month USD LIBOR remained in a narrow band, increasing from 18.5 bps in December 2020 to a peak of 25.0 bps in June, before declining to 19.4 in December 2021. Item (Y-o-Y, % change) 3 LIBOR-JPY Cash at Banks Currency in Circulation Outside Banks Dec-21 4.2.2 LONG-TERM SWAP RATES 0.5 Narrow money M111 increased by 17.0% to reach AED 701.9 billion at the end of December 2021, driven mainly by the rise in monetary deposits (84.2% of M1) by 20.3% to reach AED 607.8 billion. In billion Dirhams The spread of the 10-year swap rate on the Dirham vs. that on the USD decreased from 99.0 bps at the end of 2020 to 59.6 bps at the end of 2021. 12 Dec-21 Meanwhile, monetary aggregate M210 increased by 5.7% to reach AED 1,563.1 billion, despite a decline in quasi-monetary deposits (59.4% of M2) by 2.0%, which became less attractive to savers due to low interest rates. Table 4.2. Total Deposits at UAE Banks Source: Bloomberg Note: Based on average monthly data 1.5 *Preliminary data Source: CBUAE, Data and Statistics Centre Nov-21 2 Oct-21 1,856.7 Oct-21 1,563.1 Aug-21 701.9 Sep-21 Dec-21* Figure 4.2. EIBOR and LIBOR Rates (%) Jun-21 1,786.9 Aug-21 1,485.9 Apr-21 668.5 Jul-21 Sep-21 0.0 Feb-21 1,772.6 June-21 1,488.5 Dec-20 659.5 May-21 Jun-21 Total bank deposits increased by 5.9% Y-o-Y while resident deposits (88.4% of total deposits) increased by 5.0% Y-o-Y in 2021, owing mainly to an increase in private sector deposits by 8.3%, while non-resident deposits (11.6% of total deposits) increased by 14.1%. 5.0 Oct-20 1,769.3 4.3.1.1 BANK DEPOSITS 10.0 Apr-21 1,478.5 15.0 Aug-20 600.0 20.0 Mar-21 Dec-20 25.0 Jun-20 M3 The 3-month USD LIBOR declined in 2021 from 0.23% in December 2020 to a trough of 0.12% in September, before recovering to 0.20% by the end of the year, as the Fed signalled its intention to start tapering its asset purchase programmes and increasing interest rates after that (see chapter 1, section 1.4). 30.0 Feb-20 M2 The 3-month EIBOR in the UAE declined slightly from 0.41% in December 2020 to 0.39% in December 2021, owing to sufficient liquidity in the banking system. Jan-2020 M1 35.0 Feb-21 Billion Dirhams The number of licensed commercial banks in the UAE was 59 at the end of 2021, of which 22 were national banks and 37 foreign banks (including 10 wholesale banks). Moreover, due to increased digitalisation, the number of national banks’ branches fell by 28 to reach 513 at the end of 2021. The number of employees at banks operating in the UAE rose marginally by 47 in 2021 to reach 33,491 employees. 40.0 Apr-20 Table 4.1. Money Supply in the UAE 4.3.1 BANKING STRUCTURE Figure 4.3. Spread of 3-month EIBOR vs. 3-month USD LIBOR (bps) NBFI (Y-o-Y, % change) Non-Resident Deposits (Y-o-Y, % change) Dec-19 Dec-20 Dec-21 1,870 1,885 1,997 6.5 0.8 5.9 1,649 1,682 1,766 6.9 2.0 5.0 303 287 288 4.4 -4.6 0.3 244 255 248 17.7 3.9 -2.7 1,058 1,100 1,191 4.8 4.0 8.3 44 40 38 24.8 -9.9 -4.5 221 202 231 3.7 -8.6 14.1 Source: CBUAE, Data and Statistics Centre. Note: Data as of end of period. Dec 2021 data are preliminary.  Interest rate swaps correspond by definition to the exchange of a fixed rate for a floating payment that is linked to an interest rate, most often the London Interbank Offer Rate (LIBOR). 37
24. Central Bank of the UAE ANNUAL REPORT 2021 4 .3.1.2 BANKS’ ASSETS AND CREDIT Total assets increased by 4.2% Y-o-Y while gross credit increased by 0.8%. In addition, domestic credit increased by 1.4%, owing mainly to the rise in credit to GREs by 11.6% and to the private sector by 1.1%. In contrast, credit to the government declined by 6.3%. Table 4.3. Assets and Credit at UAE Banks In billion Dirhams Item Total Assets (Y-o-Y, % change) Gross Credit (Y-o-Y, % change) Domestic Credit (Y-o-Y, % change) Government (Y-o-Y, % change) GREs (Y-o-Y, % change) Private Sector (Y-o-Y, % change) Corporates (Y-o-Y, % change) Individuals (Y-o-Y, % change) NBFI (Y-o-Y, % change) Foreign Credit (Y-o-Y, % change) In lending to the domestic economy, the highest increase was in manufacturing (12% Y-o-Y), followed by mining and quarrying (9.8%) and electricity, gas and water (3%). Table 4.4. Domestic Credit by Economic Activity In billion Dirhams Economic Activity Total Dec-19 Dec-20 Dec-21 1,593 1,597 1,619 5.5 0.3 1.4 Dec-19 Dec-20 Dec-21 3,086 3,188 3,322 7.6 3.4 4.2 1,759 1,779 1,794 6.2 1.2 0.8 1,594 1,597 1,619 5.6 0.3 1.4 258 252 236 34.9 -2.1 -6.3 185 220 245 9.9 18.7 11.6 1,135 1,108 1,121 0.4 -2.3 1.1 802 779 773 (Y-o-Y, % change) 1.2 -2.9 -0.7 332 330 348 Transport, Storage and Communication 57 85 -1.5 -0.9 5.5 (Y-o-Y, % change) 10.8 16 16.6 16.8 -19.5 8.5 1.2 165 182 175 12.6 9.8 -3.9 Source: CBUAE, Data and Statistics Centre. Note: Data as of end of period. Dec 2021 data are preliminary. (Y-o-Y, % change) Of which: Mining and Quarrying (Y-o-Y, % change) Manufacturing (Y-o-Y, % change) Electricity, Gas and Water (Y-o-Y, % change) Construction and Real Estate (Y-o-Y, % change) Trade All Others (Y-o-Y, % change) 11 15 16 -27.7 40.2 9.8 80 74 82 4.5 -8.6 12 23 27 28 33.7 20.1 3 311 328 327 4.3.2 FINANCIAL SOUNDNESS INDICATORS 4.4.1 NEW LICENCES The Advances to Stable Resources Ratio (ASRR) of the banking system was broadly stable at 77.3% by the end of December 2021, remaining well below the regulatory cap of 100%. Meanwhile, the Eligible Liquid Assets,13 as a percent of total liabilities14 rose to 19.6% at the end of December 2021, well above the 10% minimum regulatory requirement. Total liquid assets at banks at the end of December 2021 stood at AED 529.3 billion, increasing by 11.6% Y-o-Y. This constituted an adequate liquidity buffer for the banking system. The number of related insurance professions were 465 by the end of 2021, while the number of insurance companies remained the same in 2021 at 62 (23 national traditional insurance companies, 12 national Takaful insurance companies and 27 foreign insurance companies). Table 4.6. Number of Licensed Insurance Companies and Related Insurance Professions 2020 Overall, the UAE banking system remained wellcapitalised, with an average Capital Adequacy Ratio (CAR) at 17.2%, Tier 1 Capital Ratio at 16.1%, and Common Equity Tier 1 Ratio (CET 1) at 14.2%, well above minimum regulatory capital requirements15 The Loans to Deposits (LTD) ratio for the whole banking system decreased to 89.9% at the end of 2021, from 94.4% at the end of 2020, due to the higher increase in deposits compared to loans during the period. 1 Licensed Insurance Companies Table 4.5. UAE Financial Soundness Indicators (in %) 2021 62 62 National Traditional Insurance Companies 23 23 National Takaful Insurance Companies 12 12 Foreign Insurance Companies 27 27 2 Related Insurance Professions 433 465 Insurance Broker companies 164 168 Insurance Agents Companies 25 30 Insurance Consultant (individuals & companies) 45 46 112 129 Dec-19 Dec-20 Dec-21 Advances to Stable Resources Ratio (ASRR) 81.0 77.6 77.3 86 Eligible Liquid Assets Ratio (ELAR) 18.1 18.4 19.6 Loss & Damage Adjusters (individuals & companies) 48.6 1.9 Capital Adequacy Ratio (CAR) 17.7 18.1 17.2 Actuaries (individuals & companies) 64 67 143 146 158 -3.7 2.0 8.0 Tier 1 Capital Ratio 16.5 17.0 16.1 Third Party Administrator Companies “TPA” 21 21 CET 1 Ratio 14.7 14.8 14.2 Insurance Policies Price Comparison Websites 2 4 495 527 -1.4 5.3 -0.2 153 139 132 -0.9 -9.2 -5.2 Source: CBUAE, Data and Statistics Centre Note: Data as of end of period. Dec 2021 data are preliminary. Bank lending to Micro, Small and Medium Enterprises (MSMEs) fell by 1.8% during 2021. Source: CBUAE, Data and Statistics Centre Note: Data as of end of period. Dec 2021 data are preliminary. 4.4 THE INSURANCE SECTOR Total (1+2) Source: CBUAE The Gross Written Premiums increased in 2021, due to need for insurance coverage following the rising risks caused by the pandemic. 13 14 15 38 In the ELAR, the eligible liquid assets include required reserves, mandated by the CBUAE, certificates of deposits, m-bills held by banks at the CBUAE, in addition to zero-risk weighted government bonds and public sector debt and cash at banks. These liquid assets relate only to banks’ operations in the UAE. B  alance sheet total assets less (capital and reserves + all provisions except staff benefit provisions + refinancing + subordinated borrowing/deposits). T he minimum regulatory requirement for CAR is 13% (10.5% minimum adequacy and 2.5% capital conservation buffer), 8.5% for Tier 1 and 7% for CET 1. 39
25. Central Bank of the UAE ANNUAL REPORT 2021 4 .4.2 GROSS WRITTEN PREMIUMS GWP increased Y-o-Y by 4.2% in the first three quarters of 2021. The GWP of insurance of persons and fund accumulation increased by 11.7%, while the GWP of property and liability insurance increased by 1.7% and health insurance increased by 3.2%. 4.4.3 PAID CLAIMS The gross claims paid by insurance companies in the first three quarters of 2021 decreased to AED 19.8 billion, from AED 21.5 billion during the same period in 2020. This was mainly due to a decrease in claims for fire, engineering, construction and energy, and marine and aviation lines under property and liability insurance. 4.4.4 INVESTMENTS 4.4.5 CAPITAL ADEQUACY OF INSURANCE COMPANIES 4.5 THE SECURITIES MARKETS The Own Funds to Minimum Capital Requirement (MCR) Ratio increased to 298.7% in Q3 2021, compared to 287.6% in Q3 2020, due to an increase in own funds eligible to meet the Minimum Capital Requirements. The Abu Dhabi Securities Exchange (ADX) share price index increased in 2021 by 68.2% Y-o-Y, while the Dubai Financial Market (DFM) index rose by 28.2%. Share Prices The Own Funds to Solvency Capital Requirement (SCR) Ratio rose to 191.2% in Q3 2021 compared to 187.8% in Q3 2020, due to an increase in own funds eligible to meet Solvency Capital Requirements. The volume of funds invested by the sector amounted to AED 77.6 billion at the end of Q3 2021 (63.2% of total assets), compared to AED 70.3 billion for the same period in 2020. The increase is primarily a result of diversification of investment classes in line with the financial regulations for conventional and Takaful insurance companies. The Own Funds to Minimum Guarantee Fund (MGF) Ratio reached to 312.6% in Q3 2021 up from 274.2% in Q3 2020, due to higher eligible funds to meet Minimum Guarantee Funds. Table 4.7. Key Financial Indicators of the Insurance Sector 4.4.6 ASSET QUALITY RATIO Billion of Dirhams National Companies Q1-Q3 2020 Gross Written Premiums Property and Liability Insurance Health Insurance Persons and Fund Accumulation Gross Paid Claims Property and Liability Insurance Q1-Q3 2021 Foreign Companies Q1-Q3 2020 Q1-Q3 2021 Total Q1-Q3 2020 Q1-Q3 2021 23.4 24.1 10.2 10.9 33.6 35.0 9.7 10.0 2.3 2.2 12.0 12.2 12.0 12.1 3.6 4.0 15.6 16.1 1.7 2.0 4.3 4.7 6.0 6.7 14.1 13.1 7.4 6.7 21.5 19.8 5.0 3.7 1.3 1.1 6.3 4.8 Health Insurance 8.4 8.7 2.7 3.0 11.1 11.7 Persons and Fund Accumulation 0.7 0.7 3.4 2.6 4.1 3.3 Total Investments* 34.6 37.8 35.7 39.8 70.3 77.6 Total Assets* 72.0 72.9 46.5 49.9 118.5 122.8 Total Equity* 21.7 22.1 5.9 6.2 27.6 28.3 Source: CBUAE, Preliminary data for 2021 Note: *: End of period In ADX, the sharp increase in both share prices and market capitalisation was due to strong demand and positive market sentiment, in addition to nine new IPOs. Dubai’s Securities and Exchange Higher Committee made the announcement that it intended to raise the stock market size to AED 3 trillion, as well as the listing of state and government-owned companies on DFM as part of its plans to increase listing in various sectors. Table 4.9. UAE Securities Markets The net total profit to net written premiums ratio decreased to 11.2% in Q3 2021 compared to 16.2% in Q3 2020. The net underwriting profit to net written premiums ratio increased to 13% in Q3 2021 compared to -8.2% in Q3 2020, due to a decrease in paid claims in 2021. 2020 2021 *Share Price Index *Market Abu Dhabi Capitalisation **Traded Value Table 4.8. Early Warning Ratios for Insurance Companies, % 2020-Q3 *Share Price Index 2021-Q3 Capital Adequacy Ratios Dubai Own Funds to Minimum Capital Requirement (MCR) 287.6 298.7 Own Funds to Solvency Capital Requirement (SCR) 187.8 191.2 Own Funds to Minimum Guarantee Fund (MGF) 274.2 312.6 Net total profit to net written premiums 16.2 11.2 Net Underwriting profit to net written premiums -8.2 13.0 Return on avg. assets 0.7 0.5 Asset Quality Ratio *Market Capitalisation **Traded Value (Y-o-Y, %) -0.6 68.2 AED bn 742 1626 (Y-o-Y, %) 39.8 119.0 AED bn 65 342 (Y-o-Y, %) 46.5 423.2 (Y-o-Y, %) -9.9 28.2 AED bn 340 409 (Y-o-Y, %) -9.1 20.5 AED bn 65 70 26.6 8.1 (Y-o-Y, %) Source: UAE Securities and Commodities Authority Note: * indicates end of period ** indicates value during the whole year Source: CBUAE Note: Preliminary data for 2021 40 41
26. Central Bank of the UAE ANNUAL REPORT 2021 In billion Dirhams CREDIT DEFAULT SWAPS (CDS) CDS – the insurance premium against borrower defaults – decreased for most countries during 2021 owing to improved economic conditions. For the government of Abu Dhabi, the CDS premium fell by 21.4 basis points (bps) to 43.1 bps, which is the lowest CDS premium in the Middle East and Africa region, boosted by confidence in Abu Dhabi’s fiscal position and its sovereign wealth funds. Meanwhile, Dubai’s CDS fell by 75.6 bps to 95.8 bps. Table 4.10. Sovereign Credit Default Swaps (CDS) Bps Abu Dhabi Dubai 2018 2019 2020 2021 62.6 54.0 64.5 43.1 118.2 128.2 171.4 95.8 Source: Bloomberg, Note: Average of the year In billion Dirhams 2020 2021 Assets 59.7 94.5 286.9 374.0 5.1 Travel** 90.4 126.5 5.2 Transport 60.0 90.9 59.3 90.1 0.7 0.8 3.2 3.7 5.4 Freight & Insurance 55.0 65.3 5.5 Other services 78.3 87.6 6.6 9.1 5.5.2 Intellectual property 11.2 12.0 5.5.3 Information-Computer-Telecommunication 24.6 27.2 18.6 20.2 6.0 7.0 5.5.4 Health services 8.5 10.4 5.5.5 Cultural and Creative Industry services 1.5 1.8 25.9 27.0 -227.2 -279.5 6.1 Travel -58.4 -80.0 6.2 Transport -32.5 -45.8 -32.0 -45.3 -0.5 -0.5 B. Services ( NET ) 5. Credits 5.2.1 Air & Ports 5.2.2 Postal 5.3 Government Services - Computer - Information & Telecom 77.5 176.2 A. Trade Balance (a+b) 221.6 290.3 a. Total Exports & Re Exports – FOB (1+2+3) 999.5 1,187.4 1. Total Exports of Hydrocarbon 135.1 230.8 1.1 Crude Oil Exports 65.9 110.5 1.2 Petroleum Products Exports 49.2 90.0 1.3 Gas Exports 20.0 30.3 6.3 Government Services -5.0 -5.0 394.5 415.0 6.4 Freight & Insurance3 -86.4 -99.7 2.1 Free Zone Exports 251.8 259.9 6.5 Other services -44.8 -49.0 2.2 Other Exports1 142.7 155.1 6.5.1 Construction -7.4 -8.8 3. Re Exports2 469.9 541.6 6.5.2 Intellectual property -6.9 -9.1 b. Total Imports (FOB)3 -778.0 -897.1 -15.8 -15.2 4. (Total Imports - CIF )* -864.4 -996.8 -5.8 -5.5 4.1 Other Imports4 -536.1 -644.7 -10.0 -9.7 4.2 Free Zone Imports -318.3 -340.0 6.5.4 Health services -2.9 -3.3 -10.0 -12.1 6.5.5 Cultural and Creative Industry services -0.2 -0.3 -11.6 -12.4 2. Total Exports of Non-Hydrocarbon 4.3 Gas Imports 42 2021 5.5.1 Construction Table 4.11. The UAE Balance of Payments Statistics Current Account Balance (A+B+C+D) 2020 5.5.6 Other5 6. Debits 6.2.1 Air & Ports 6.2.2 Postal 6.5.3 Information-Computer-Telecommunication - Computer - Information & Telecom 6.5.6. Other5 43
27. Central Bank of the UAE ANNUAL REPORT 2021 In billion Dirhams In billion Dirhams 2020 2021 2020 2021 -6 .9 -2.7 UAE Central Bank 1. Banking System6 -4.0 -4.1 Foreign Assets (including the IMF) 391.9 481.5 2. Private non-banks -3.0 -4.2 Foreign Assets of the Central Bank 388.1 466.4 3. Enterprises of Public Sector 12.9 25.3 Reserve Position with IMF & SDR 3.8 15.1 4. Official Debt Services (Interest) -3.4 -5.2 Reserve Position with IMF 3.0 2.9 5. Foreign Hydrocarbon Companies in UAE -9.4 -14.5 SDR Holding 0.8 12.2 -196.9 -205.8 10.8 15.4 -60.0 -65.3 SDR Allocation 3.0 14.3 0.0 0.0 Foreign Liabilities of the Central Bank 7.8 1.1 -60.0 -65.3 Net Foreign Assets (including the IMF) 381.1 466.1 -136.9 -140.5 Net Foreign Assets of the Central Bank (Excluding the IMF) 380.3 465.3 22.3 34.1 Change in Net Foreign Assets (including the IMF) -13.1 85.0 -159.2 -174.6 Change in Net Foreign Assets of the Central Bank (Excluding the IMF) -13.6 84.7 0.5 0.3 C. Investment Income (NET) D. Transfers ( NET ) 1. Public - Inflows - Outflows 2. Private - Inflows - Outflows Foreign Liabilities (including the IMF) Change in Reserve Position with IMF + SDR Capital and Financial Account -97.1 -96.8 0 0 Financial Account -97.1 -96.8 a. Private capital -75.0 -66.9 3.4 -6.9 a-1-1 Outward -69.5 -82.8 a-1-2 Inward** 72.9 75.9 4.0 4.5 -42.4 -21.2 -34.2 -18.5 -8.2 -2.7 -40.0 -43.3 -22.1 -29.9 6.0 5.3 -13.1 85.0 Change in Reserves of the Central Bank*** 13.6 -84.7 Change in Reserve Position with IMF & SDR*** -0.5 -0.3 Total change in International Reserves*** 13.1 -85.0 Capital Account a-1 Direct Investment a-2 Portfolio Investment a-3 Banks a-3-1 Securities a-3-1 Other investment (loans, deposits) a-4 Private nonbanks b. Enterprises of Public Sector Errors and omissions Overall balance (Total Change in International Reserves) 44 1) Including Estimates of other Exports from all Emirates 2) Including Re-exports of Non-Monetary Gold 3)The revision in the import (FOB) and Freight & insurance (debit side of the service account) was due to changes in the assumed ratio to compute FOB values of imports based on CIF values. The ratio is revised downward from 15% to 10% based on the results of a recent survey, which better reflects all components of UAE trade based on actual UAE 2017 import structure. 4) Including Estimates of Imports from all Emirates and Imports of Non-Monetary Gold 5)Includes estimation for financial services, research and development services, professional and management consulting services, technical, trade-related and other business services and the rest of insurance services apart from cargo 6)Central Bank and all Banks * For information only ** Source: The Federal Competitiveness and Statistics Centre (FCSC) *** Negative numbers of international reserves indicate an increase, positive numbers indicate a decrease 45
28. Central Bank of the UAE ANNUAL REPORT 2021 KEY HIGHLIGHTS IN 2021 02 MAIN ORGANISATIONAL HIGHLIGHTS The CBUAE Board approved a revised operating structure , the Targeted Operating Model (TOM), to govern its mandated operations. The TOM is based on six core and support functions, each headed by an Assistant Governor with relevant delegated authority, in addition to two units with functional independence, which report directly to the Governor - CBUAE Internal Audit and the Financial Intelligence Unit (FIU). During 2021, the CBUAE merged successfully with the Insurance Authority, bringing the regulation and supervision of all banking and insurance services sectors within one body. It also obtained five ISO certifications – the global standard for quality assurance in management systems, processes and services – covering its Integrated Management System and four other elements, including Information Security and Business Continuity. On the human capital side, the CBUAE launched its Ideation Management system for all employees (Nabtakir System) and reached a staff Emiratisation level of 65.2%. 46 47
29. Central Bank of the UAE ANNUAL REPORT 2021 1 . LATEST DEVELOPMENTS IN THE TARGETED ECONOMIC SUPPORT SCHEME (TESS) The UAE has been among the leading countries globally in COVID-19 vaccination rates and the implementation of effective emergency measures during the pandemic. The CBUAE’s wide-ranging measures under the Targeted Economic Support Scheme (TESS) helped to protect the UAE financial system and economy during the pandemic and throughout 2021 supported the UAE’s recovery. The implementation of TESS achieved its objective in helping ensure the resilience of the financial system in the UAE, easing the cash-flow pressures of affected retail and corporate borrowers, maintaining adequate liquidity conditions, and mitigating pandemic-related operational challenges. The UAE banking system sustained strong fundamentals and financing capacity within the economy. The TESS deferral programme played a crucial role in the UAE community by supporting 322,000 borrowers with temporary constraints due to the negative impact of the pandemic on household and corporate cash flows. The outstanding amount of loans and financing that benefited from the TESS deferral relief reached 15% of total bank loan portfolios at the peak of the pandemic. Figure 5: Beneficiaries of the TESS deferral program 322,000 10,006 Supported 15% of Bank Loan/Financing Portfolios TESS DEFERRAL PROGRAM 1,934 Small and Medium Enterprises Private Corporates The CBUAE has kept TESS prudential relief measures regarding banks’ capital buffers and liquidity and stable funding requirements to provide banks with enhanced flexibility while the recovery gains momentum. They will be phased out by June 30, 2022. Further support measures that temporarily remain include the reduced reserve requirements and a decreased downpayment requirement for new mortgage loans. Figure 6: CBUAE’s TESS Gradual Exit Strategy Waiver of CBUAE Payment System Processing Fees for safeguarding the UAE financial system and the economy during the COVID-19 pandemic. * T he Frontline Heroes Office, established in July 2020 by Presidential Decree under the Chairmanship of His Highness Sheikh Mohamed Bin Zated Al Nahyan, is dedicated to recognising those working on the frontline and raising awareness of the key contributors during crises and emergencies. TESS Loan Deferral Program Guidance on IFRS 9 Loan Classification Criteria Phase II of the TESS Exit Strategy (30 June 2022) Prudential Liquidity Requirements Relief Stable Funding Requirements Relief Capital Buffer Requirements Relief TESS Recovery Program TESS Zero Cost Funding Liquidity Facility Gradual Basel III Implementation Phase III of the TESS Exit Strategy Reduction of Reserve Requirements The CBUAEs response to the COVID-19 pandemic was recognised by the Frontline Heroes Office* 48 The CBUAE rebalanced TESS during 2021, replacing measures designed to mitigate the immediate adverse effects of the pandemic with targeted steps to support the recovery. As part of this balanced approach, the TESS deferral programme, designed to provide temporary cash-flow relief, was phased out to half by 30 September 2021 and fully by 31 December 2021. Phase I of the TESS Exit Strategy (31 December 2021) bank customers benefitted Individual Borrowers In 2021, the CBUAE’s crisis management focus shifted towards supporting economic recovery while continuing to safeguard financial stability. The CBUAE devised a comprehensive exit strategy from the broad-based emergency measures implemented during the pandemic, balancing the winding-down of TESS measures with a commitment to support the recovery. The Central Bank’s effective well-sequenced crisis management exit strategy strikes the right balance between a gradual lifting of emergency measures and continued support of the economic recovery. More than 309,535 Balanced Gradual Exit Strategy LTV Increase for First Time Home Buyers Prudential Filter Selected Crisis Management Exit Schedule of the CBUAE›s Targeted Economic Support Scheme (TESS). PRO-ACTIVE AND TRANSPARENT COMMUNICATION DURING THE COVID-19 PANDEMIC Ensuring the highest level of transparency amid uncertainty, the CBUAE issued over 20 announcements to inform the public of pandemic-related developments and measures. The IMF’s Article IV mission to the UAE in 2021 highlighted the importance of the “swift and substantial policy response and the clear and proactive communication by the CBUAE“. 49
30. Central Bank of the UAE ANNUAL REPORT 2021 2 . NEW STRATEGIC PLAN FOR 2023-2026 In 2021, the CBUAE developed its new strategic plan for 2023-2026 based on five focus areas: compliance with relevant international standards; sustainability; innovation and technology; collaboration, partnership, and transparency; and building a high-performance central bank. The new strategy aims to make the CBUAE among the top central banks globally in promoting monetary and financial stability and supporting the UAE’s competitiveness. The new strategy consists of eight objectives: two strategic, four core and statutory, and two common enablers, as shown in Figure 7. Figure 7: CBUAE Objectives MISSION VISION Enhancing monetary management, financial stability, and protecting consumers through effective supervision of Licensed Financial Institutions, prudent management of reserves, robust financial infrastructure and adoption of digital technologies To be among the top central banks globally in promoting monetary and financial stability and supporting the UAE’s competitiveness ● Continue to drive digital transformation in the financial sector through projects including a nationwide e-KYC platform, implementation of an Open Finance strategy and platform, and setting up a SME Funding Platform with cross-UAE stakeholders. Sustainability Innovation and technology 3. SUPERVISION OF AML AND CFT MEASURES Collaboration, partnership and transparency Build a high performance central bank 2 50 Support UAE competitiveness and diversity and growth of the financial sector in line with future economic trends Establish robust and innovative financial market infrastrure, and support shaping the future of the UAE’s financial technology and digitalisation journey 3 Enhance monetary and fiancial stability 4 Advance the regulatory and supervisory framework for Licensed Financial Institutions 5 Enhance trust and confidence in the UAE’s financial services sector 6 Strengthen the role of the insurance sector in providing the necessary protection for society and the economy ● Ensure readiness for Financial Sector Assessment Programme (FSAP); ● Implement the SupTech programme; and Compliance with relevant international standards 1 ● Foster sustainable national growth through green finance; ● Issue a Central Bank Digital Currency (CBDC); FOCUS AREAS Core Objectives To achieve these ambitious strategic objectives, the CBUAE developed a comprehensive action plan that sets out the priorities, projects and desired outcomes for the period. The following projects, some of which are already underway, will form important milestones in the CBUAE’s transformation journey between 2023 and 2026: ● Implementation of the National Payment System Strategy (NPSS); CBUAE Strategic Objectives The CBUAE will continue to support the UAE ranking in key indicators of global competitiveness, which were defined by the Government to achieve the objectives of the UAE Centenary 2071 vision of being the best country in the world by 2071. To that end, the CBUAE developed a new list of strategic indicators to measure and benchmark its performance in key areas, particularly for monetary and financial stability, innovation and technology. Common Enablers 7 Attract, retain and empower toptalent and provide efficient andeffective corporate services as well as digital infrastructure One of the CBUAE’s key strategic objectives is to ensure adherence to the UAE’s Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) legal and regulatory framework and to identify relevant threats, vulnerabilities and emerging risks in the UAE financial sector. During the course of 2021, the CBUAE coordinated closely with the National AML/CFT Committee (NAMLCFTC), to implement relevant aspects of the National AML/CFT Strategy, and the National Action Plan developed to support it. In recent years, the CBUAE has made significant progress in strengthening the AML/CFT legal and regulatory capability of the UAE through initiatives, such as establishing an adequately-staffed AML/CFT supervision function with a clear mandate, as per Financial Action Task Force (FATF) expectations, as well as developing guidance notes for the supervised sectors (banks, finance companies, exchange houses and hawala providers). It has also implemented a risk-based supervision methodology, supported by an automated AML/CFT risk assessment tool (AMLex) and examination of LFIs as per the resulting risk profiles. The CBUAE enhanced cooperation with local and international agencies, with a view to sharing financial intelligence and training. It also organised workshops with LFIs to enhance their knowledge of the CBUAE's AML/CFT-related expectations, and conducted training of CBUAE staff to international standards, to strengthen their general competency in the AML/CFT field. Implementation of Technology for a Risk-based Approach Following FATF guidance, the CBUAE took measures to strengthen its risk-based supervisory methodology by putting into operation a data analysis tool to drive the prioritisation of supervisory engagements and the development of its 2021 supervisory calendar. The new tool enables the risk categorisation of LFIs based on inherent risk scores, using comprehensive data from LFIs across the sectors, as well as control effectiveness scores determined through supervisory engagements. The CBUAE noted excellent cooperation from all of its supervised sectors. Examinations and Enforcement Referrals In 2021, the CBUAE conducted a range of engagements, including full-scope examinations, thematic reviews, follow-up on control deficiencies and targeted training on various AML/CFT topics, commensurate with the LFI's risk exposure. These included four thematic reviews on legal persons and arrangements, targeted financial sanctions, tradebased money laundering and counter-measures (FATF high risk jurisdictions and cash), which were identified in line with the National Risk Assessment. Where significant deficiencies were identified in LFI's during supervisory engagements, the CBUAE followed up with dissuasive action. 8 Implement innovative practices to improve the flexibility, proactivity and responsiveness of the CBUAE work environment 51
31. Central Bank of the UAE ANNUAL REPORT 2021 Figure 8 : An overview of the risk-based supervision actions taken by the CBUAE 24 32 Banks 2 12 Exchange Houses 1 1 Insurance Companies 3 3 12 5 AML/CFT GUIDANCE INSTRUCTIONS ISSUED IN 2021 5 6 8 17 11 12 AML Full Scope Thematic review (Counter measures) Thematic review (Cash) Thematic review (TFS/TBML Combined Evaluation) Follow up on control deficiencies Thematic review (Legal person/arrangement) Warning letters/self - assessment on controls/verification on controls by CBUAE Engagement with MLRO and Senior Management on AML/CFT framework On site - Full scope 12 months Follow up visit Examination conducted on 3 insurance brokers in addition to insurance companies. Guidance for LFIs on Suspicious Transaction (9 June 2021) Assists LFIs in understanding their obligations relating to Suspicious Transaction Reporting (STR) and reporting timelines, including on how to implement appropriate internal controls for identifying suspicious activity and transactions and filing reports of the highest quality to the UAE’s Financial Intelligence Unit (FIU) through the GoAML portal. Guidance for LFIs Providing Services to Legal Persons and Arrangements (9 June 2021) Provides guidance to LFIs on the specific ML/TF risks associated with legal persons and arrangements and common typologies and assists them in applying preventive measures to mitigate associated risks as part of their compliance framework. Guidance for LFIs providing services to the Real Estate and Precious Metals and Stones Sector (20 June 2021) Sets out the specific ML/TF risks and typologies associated with real estate and precious metals and stones sectors, the risks that LFIs offering services to these sectors may be exposed to and the CBUAE’s expectations on how to apply relevant preventative measures. Guidance for LFIs on the implementation of Targeted Financial Sanctions (8 July 2021) Developed in close collaboration with the Executive Office of the Committee for Goods and Materials Subjected to Import and Export Control, the national lead to coordinate the implementation of Targeted Financial Sanctions. It assists LFIs in understanding and implementing their obligations related to Targeted Financial Sanctions, screening and reporting requirements and the development of a sanctions compliance programme. Guidance for Registered Hawala Providers and for LFIs providing services to Registered Hawala Providers (18 August 2021) Describes the vulnerabilities of hawala activity for abuse by illicit actors and the risks to which Registered Hawala Providers and the LFIs that provide services to them may be exposed and provides guidance in applying preventive measures and the implementation of their AML/ CFT obligations. Guidance for LFIs on Transaction Monitoring and Sanctions Screening (13 September 2021) Provides guidance in applying preventive measures and implementation of AML/CFT obligations by the LFIs in relation to the design, implementation and maintenance of transaction monitoring and sanctions screening programmes. Guidance for LFIs providing services to Cash-Intensive Businesses (28 September 2021) Describes the specific vulnerabilities of cash, alternatives to cash and the features of Cash-Intensive Businesses, provides potential risk indicators for each of these features and assists in the application of preventive measures. Guidance for Licensed Exchange Houses (17 November 2021) Assists the understanding and mitigation of risks as well as the effective implementation by the Licensed Exchange Houses of their AML/CFT statutory obligations. Increased Cooperation to supervise LFIs The CBUAE was proactive in strengthening national AML/CFT efforts through collaboration with multiple domestic stakeholders and authorities. This included concluding MoUs with domestic and foreign supervisory authorities as a formal basis for cooperation on operational issues, including the confidential exchange of regulatory and prudential information, investigative assistance to conduct inquiries and examinations, and mutual assistance in identifying risks and cooperation opportunities necessary for the effective AML/CFT supervision of LFIs. Official Guidance Issued to LFIs In line with the risks identified in the Mutual Evaluation Report (MER) issued by FATF in 2020, the CBUAE developed a suite of targeted guidance to assist the understanding of risks and implementation of the obligations of banks, exchange houses, finance companies, registered hawala providers, insurance companies, agencies and brokers. The CBUAE issued all guidance to its LFIs, followed by dedicated outreach sessions, and published the guidance on its website (https://www.centralbank.ae/en/cbuae-amlcft). 52 Ongoing Outreach to LFIs The CBUAE developed a comprehensive outreach programme to promote the LFIs’ awareness of the CBUAE-issued Guidance, understanding of ML/TF risks and implementation of their AML/CFT obligations. The programme was developed with LFIs’ involvement, based on ML/TF risk assessments carried out within the CBUAE at institutional and sectorial levels, the identification of trends in supervisory findings during on-site examinations, and intelligence gathered through domestic cooperation. In addition to events organised as part of an annual programme that includes a dedicated forum for banks’ compliance officers, the CBUAE conducted outreach sessions following the issuance of each Guidance to LFIs. 53
32. Central Bank of the UAE ANNUAL REPORT 2021 4 . SUPERVISION OF THE BANKING SECTOR, PAYMENT SYSTEMS AND EXCHANGE HOUSES Risk-based supervision allows the CBUAE to assess and examine banking groups on a consolidated basis. We have sustained our dialogue with the industry to set out regulatory expectations, and completed new regulatory initiatives in 2021 to make financial institutions operating in the UAE more resilient, in line with international standards and best practice. Ahmed Saeed Al Qamzi Assistant Governor - Banking and Insurance Supervision During 2021, the CBUAE continued its work to ensure robust supervision of a sound national financial sector, in accordance with its strategic and operational plan. The adoption of enhanced risk-based supervision since 2019 ensured that the CBUAE assesses any banking group operating in the UAE on a consolidated basis. The CBUAE monitored the compliance of UAE incorporated banks with prudential standards. Supervision of Licensed Financial Institutions During the unprecedented situation arising from the Covid-19 pandemic, its repercussions on the wider economy, and its consequential impact of the financial system, the CBUAE constantly monitored the changing supervisory landscape and reassessed the priorities of its examination efforts at least every quarter, to ensure that resources were allocated and re-prioritized to issues that required the most attention. The examination plans remained dynamic, to ensure that the CBUAE was responsive to the issues within its financial system as necessary, fulfilling its legal mandate for effective supervision. The CBUAE carried out baseline, follow-up and thematic risk-based reviews of LFIs to measure financial performance and validate regulatory requirements, including (but not limited to) governance, capital, liquidity, earnings, credit quality, and control measures over service and operational resilience. The quality and consistency of the examination process remain a key focus, and were streamlined through the establishment of Standard Operating Procedures. Foreign Operations of Local Banks As part of its enhanced consolidated risk-based supervision, the CBUAE recognised the need for enhanced transparency and consistent insight into the foreign operations of locally-incorporated banks. Accordingly, the CBUAE introduced the requirement 54 for a Long Form Audit Report (LFAR) to ensure the adequate monitoring of a bank’s activities within different jurisdictions and to establish minimum reporting requirements with a focus on assessing the application of prudential standards to all aspects of the business. This LFAR is an additional supervisory tool to achieve consolidated supervision on an ongoing basis for increased monitoring of the foreign and cross-border operations of local banks. In other words, since not all of the banks’ overseas operations are reviewed every year on a risk-based approach, the LFAR provides additional information to enable the CBUAE to assess any evolving risks on a consolidated basis. During 2021, CBUAE reviewed 23 LFAR reports from various jurisdictions where the local banks operated through branches or subsidiaries. respective risk profile and systemic importance over the past three years. In addition, CBUAE supervisors participated in supervisory colleges organised by consolidated (home) supervisors to share information and cooperate in the effective supervision of the group and its entities. The CBUAE handled numerous requests from other regulators, both domestic and foreign, including the Securities and Commodities Authority (SCA). Coordination with Banks on Real Estate Exposure The CBUAE worked closely with the UAE Banks Federation (UBF) to develop real estate lending (REL) standards. The basic aim was to understand better and define risks in current REL practices, to set expectations for measuring and monitoring exposure and concentration levels in REL. National Loan Scheme Launched in 2019, the National Loan Scheme has provided relief to more than 4,710 UAE national borrowers and their families. This landmark initiative aims to ease excessive debt accumulation and the management of debt settlements. Risk-based Supervision Upskilling The Risk-Based Supervision Training Programme saw 36 UAE citizens graduate during 2021. The programme, which has a special focus on UAE national examiners, is a collaboration with the Institute of Bankers in Ireland (IOB) and the CBUAE. Advanced Asset Quality Thematic examination Supervisory Review and Evaluation Process The CBUAE conducted a more advanced systemwide thematic review of asset quality for exposures exceeding a system-wide threshold of AED 500 million, with findings presented to the Supervisory and Regulatory Committee. The borrowers were reviewed for their exposures and performance across all material lenders. The key objectives of this thematic review were to: Four Supervisory Review and Evaluation Process (SREP) reports were completed and updated following examination of D-SIBs and other major banks. SREP was developed as a conceptual framework to conduct a comprehensive assessment of a bank’s overall business model, corporate governance, and the risk to and adequacy of its capital and liquidity resources. ● Enhance the consistency of classifications for the same borrowers across the banks; ● Ensure the adequacy of provisions for nonperforming loans; and ● Identify any exposure that may require close monitoring and review. Consolidated Supervision and Regulatory Cooperation To enhance effective supervisory oversight, the CBUAE organised supervisory colleges for banks with material cross-border operations, taking into account In addition, as a SREP alternative, the CBUAE introduced ‘Institutional profile’ reports (a brief summary and risk evaluation), which remains in the development and testing phase for other banks. Institutional profiles for two banks were completed during the testing phase in 2021. Finance Companies The CBUAE completed 17 risk-based examinations for finance companies, and reviewed asset quality thematically. The finance companies risk database was upgraded during 2021, and updated on a quarterly basis. Exchange Houses and Remittances The exchange house sector in the UAE plays a critical role in providing access to financial services for those who are unable to participate in the formal banking sector. This ensures that expatriates, and notably low-wage earners, can receive their salaries securely and remit funds back to their home countries on a regular basis. During 2021, the CBUAE conducted 28 regulatory and 20 AML/CFT examinations on exchange houses. Hawaladars In 2019, the CBUAE issued the Registered Hawala Provider Regulations, introducing a formal registration process for hawaladars in the UAE. The regulation aims to protect customers using registered hawala providers, to increase transparency in the remittance market and to improve services for expatriates remitting to countries where access to financial services is limited. The first official registration certificate was issued in 2021. By the year-end, the CBUAE had approved 55 hawaladars, with approval in principle for another six companies. It conducted twenty AML/CFT inspections on hawaladars. Payment System Oversight The pandemic continued to present challenges and opportunities for the UAE’s payment system. The CBUAE’s financial market infrastructure (FMI) aims to provide a reliable payment capability, with the ability to maintain operations under extreme circumstances - a critical factor in ensuring financial stability. The UAE FMI systems, operated by the CBUAE, were tested on the efficiency of their business continuity plans and sound operations, using the international standards of the Principles of Financial Market Infrastructure (PFMI)16. By conducting risk-based assessments at least annually, the CBUAE was able to prepare for situations likely to impact PFMI’s operational reliability adversely in the future. The FMI systems are benchmarked to ensure a high level of compliance. The CBUAE has designated these systems as systemically important. It also ensures that the equally-important critical service providers and vendors meet the CBUAE’s financial stability objective through periodic evaluation and assessment against applicable principles and best practice. 16 PMFIs are the international standards for financial market infrastructure, including payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories. 55
33. Central Bank of the UAE 5 . SUPERVISION OF THE INSURANCE SECTOR During 2021, the CBUAE took on the role of supervising the UAE insurance sector, by aligning its supervisory work with CBUAE strategic objectives. This followed the government decision in 2020 to merge the Insurance Authority into the CBUAE as part of the UAE’s broader aim to transform the CBUAE into one of the world’s top central banks. The CBUAE developed an action plan to achieve full compliance with the IAIS Insurance Core Principles. Solvency Action Plan The CBUAE focused on the primary objectives of effective risk-based supervision (ensuring the safety and soundness of insurers and protecting policyholders) and developing the insurance sector in line with international best practice and standards. It adopted a solvency action plan to ensure that companies would complete their solvencystrengthening programmes in 2022, resolving solvency deficits following additional financial regulations in late 2017. Introduction of Onsite Inspection Visits A key CBUAE initiative in insurance sector supervision was to organise site visits to licensed entities using a risk-based approach, to confirm the entities’ ability to manage all risks and ensure the protection of policyholder rights. The CBUAE conducted 83 inspection visits during 2021, which covered insurance companies and other entities related to insurance. Industry Readiness to Implement IFRS 17 The CBUAE completed its industry readiness assessment to implement the new International Financial Reporting Standard for insurance contracts (IFRS 17), based on financial and operational impact assessments submitted in March 2021. It communicated the assessment results to the industry in June 2021 with recommended actions, specifically the need for early auditor engagement to mitigate project delivery risk. 56 ANNUAL REPORT 2021 ● Regulatory reporting will continue under current conditions for the time being. The CBUAE will monitor the quality of IFRS 17 reporting in the initial years of implementation, with a view to adopting IFRS 17 for regulatory purposes when the implementation is understood better and is supported by robust internal controls over financial reporting. Digital Supervisory Platform The CBUAE launched a digital supervisory platform (DSP) project to oversee the insurance sector on a holistic basis. DSP’s aim is to ensure that insurance supervision follows contemporary standards and practices, using the latest technology available to supervisors around the world. The core of this project is e-forms, a regulatory tool for data collection from insurance companies. The DSP will be integrated with other systems at the CBUAE, so that all licensed entities make their submissions in one place. The data reporting framework covers supervisory reporting, analysis and early warning capability. It will enable the CBUAE to receive insurance industry data, documents and reports, and to analyse market trends and emerging risks to adopt a forward-looking approach. One key DSP element is its transactional data module, which will provide the CBUAE with key UAE insurance sector data on a transactional level – policy by policy, claim by claim. Monitoring of COVID-19 Impacts The CBUAE continued to monitor the impact of COVID-19 on the UAE insurance industry on a monthly basis. Total paid claims related to COVID-19 amounted AED 800 million (2.0% of total incurred claims) in 2020 compared to AED 790 million (2.6% of total incurred claims) in 2021. This reduction in claims was despite an increased level of exposure due the resumption of economic activities, international travel and minimal lockdowns compared to 2020. Internal Controls over Financial Reporting (ICFR) In December 2021, the CBUAE outlined its approach to adopting IFRS 1 in the UAE for general purpose and regulatory financial reporting. Two points are important in this regard: The CBUAE has started to implement ICFR in the UAE’s insurance sector. This will permit high-quality information-sharing with the public and other stakeholders by providing assurance on the reliability of insurance firms’ financial reporting, in accordance with generally-accepted accounting principles: ● To fulfil the requirements of UAE law, general purpose financial reporting will be based on IFRS 17 from 1 January 2023 ; and ● Phase one asked companies to evaluate and test the design and implementation of the existing ICFR; and ● Phase two required companies to take any corrective action necessary to fix the gaps identified in phase one. The ICFR requirement of a separate external audit opinion by the end of 2023 was decided after taking into account industry feedback, and the CBUAE’s expectation is that implementing IFRS 17 will result in significant restructuring and re-design of companies’ internal processes and controls. Industry Consultations and Communications The CBUAE held a series of industry workshops in 2021 to communicate its supervision priorities and information requirements for 2022 to a target audience of insurance companies, actuaries and external auditors, clarifying data and reporting requirements. In addition, the CBUAE engaged in two main consultation processes on: ● The Shari’ah-compliant insurance industry (Takaful), which will be considered in future regulatory developments; and ● Life insurance. The CBUAE discussed the impact of implementing the Board of Directors’ Decision No. (49) of 2019 concerning instructions for Life Insurance and Family Takaful Insurance (“BOD49”). The CBUAE will continue to monitor the impact of these regulations. 6. NEW DEVELOPMENTS IN ISLAMIC FINANCE The CBUAE continues to encourage Islamic finance to flourish in the UAE by issuing accommodating prudential regulations and developing monetary instruments for Islamic Financial Institutions (IFIs). This includes enhancing standardisation and product innovation, supervising compliance with Shari’ah rules and consumer protection, and participating in international events to advance the Islamic finance agenda regionally and globally. The CBUAE’s strategy to foster the development of Islamic finance includes the adoption of the Islamic Financial Services Board’s (IFSB) prudential standards. As the business model of Islamic banks exposes them to different types of risk, the CBUAE issued a specific standard relating their risk management requirements. Failure in governance, business strategy and process, especially Shari’ah noncompliance related failures, could expose Islamic banks to publicity that impacts their market position, profitability and liquidity negatively. The CBUAE strategy includes issuance of dedicated liquidity risk management, as well as capital adequacy and disclosure requirements. The CBUAE’s Higher Shari’ah Authority (HSA) also reviewed regulations related to the Islamic insurance sector (known as Takaful) to ensure their suitability for the Islamic insurance industry. The CBUAE also developed monetary instruments for IFIs and, in collaboration with the HSA, enhanced the quality of the existing Shari’ah-compliant monetary instruments, which are designed to cater for the liquidity deployments and needs of IFIs, in line with the established Shari’ah standards. The HSA adopted resolutions and standards to foster standardisation and innovation in Islamic finance in the UAE, including a Shari’ah standard on debit and credit card applications in IFIs. The HSA issued guidance on products and services offered by IFIs to encourage innovative solutions in line with the highest industry standards. With the support of the Islamic banking committee of the UAE Banks Federation, the UAE adopted innovative structures and solutions for syndicated financing and Sukuk (Islamic bonds), which will enhance market confidence by providing Shari’ah-compliant legal certainty for these instruments. During the recovery period from COVID-19, the HSA extended the grace period for some standards to allow LFIs more time to apply them. The HSA also issued guidance on the transition from LIBOR to alternative benchmarks for pricing Shari’ah-compliant products and services. It performed its supervisory role on internal Shari’ah Supervision Committees by reviewing the annual Shari’ah reports of IFIs, approving new standard products and services offered to the public, and issuing clarifications on the application of certain standards, including governance and Shari’ah issues related to housing Islamic ‘windows’ within conventional banks. The CBUAE advocated policies to ease and improve Islamic finance in regional and international seminars and conferences. It chaired the 2021 IFSB Council meeting, charged with steering the development of the Islamic finance industry’s prudential landscape. In conjunction with the IFSB council meeting held in Abu Dhabi in December 2021, the CBUAE co-organised a public lecture on sustainability and cyber-security for Islamic financial institutions. It also hosted the IFSB’s Capacity Building for Market Players event for banking and insurance sectors, focusing primarily on risk and liquidity management for Islamic banks and Takaful companies. The CBUAE organised a special session on the future of Islamic finance, and the added value it brings, during the CBUAE’s Future of Finance Conference held at Expo 2020 Dubai in October 2021. The HSA also participated in the third Centralised Shari’ah Advisory Authorities event hosted by Bank Negara Malaysia to foster collaboration in Shari’ah compliance and Shari’ah governance. 57
34. Central Bank of the UAE 7 . GREEN AND SUSTAINABLE FINANCE: CBUAE MAKES IMPORTANT ADVANCES TO SUPPORT THE GREEN ECONOMY The UAE has taken a series of measures in line with its commitment to climate change mitigation and sustainable finance, including ratifying the Paris Agreement in 2016, developing the UAE Vision 2021, the Green Agenda 2015-2030, the National Climate Change Plan 2017-2050, and implementing related guidelines for specific sectors. The Ministry of Climate Change and Environment created the UAE Sustainable Finance Framework 2021-2031. The UN Framework Convention on Climate Change announced that the 28th meeting – COP28 – will be held in November 2023 in Abu Dhabi. Regulatory Developments The CBUAE’s sustainable finance initiatives cross functional areas, encompassing the environmental, social and governance (ESG) aspects of financial activities within the CBUAE’s mandate. The CBUAE is a member of the UAE Sustainable Finance Working Group, which issued Guiding Principles on Sustainable Finance in 2020 and a High-Level Statement on Sustainable Finance in 2021. The CBUAE plans to issue detailed sustainable finance and climate risk management guidelines during 2022, covering climate-related corporate governance, risk management and disclosures. Investments in ESG Financial Assets The CBUAE integrated green and sustainable financial assets as eligible investments in its Investment Policy adopted in 2020, aligned with the rising adoption of ESG investment frameworks by institutional investors globally. ANNUAL REPORT 2021 The CBUAE carries out ongoing surveillance of green and sustainable financial market developments and benchmarks ESG governance of national institutions against their global peers. ESG surveillance assesses country-specific and institution-specific gaps and developments in ESG finance in the UAE, based on international benchmarks and ESG market indicators. Special Sessions The CBUAE conducts internal sessions, chaired by The Governor, to review CBUAE-specific green and sustainable finance initiatives and progress, including the G20 sustainability aspects and the UAE’s role in hosting the COP28. Climate Risk Survey and Stress-Testing The CBUAE conducted a stocktaking survey on UAE banks’ climate-related risk management, covering UAE national banks and selected large foreign banks operating in the UAE, which included banks’ governance, risk data and measurement, stress testing and disclosures. The CBUAE will begin climaterisk stress testing of the UAE financial system in 2022. Initiative on Islamic Sustainable Finance The CBUAE also conducted an assessment on synergies between Islamic finance and sustainable finance and intends to initiate a roundtable meeting with Islamic financial institutions on Islamic sustainable finance during 2022. Climate Change Risk Assessment in the Insurance Sector The CBUAE assessed climate change risks in the insurance sector, which will affect insurance firms both as insurers and as investors in financial instruments. The adaptation of the UAE’s insurance sector to climate change considers climate-risk selfassessment and gap analysis, climate-risk mitigation measures and identification of growth opportunities. Polymer Banknote Underlines CBUAE Sustainability Plans The CBUAE marked the nation’s Golden Jubilee with a new AED 50 banknote featuring the nation’s founders and prominent Emirati landmarks, the first Emirati note to be printed on polymer plastic. This fully recyclable material is twice as durable as the previous paper notes, with more security and userfriendly features, such as Braille markings to assist the visually impaired. 58 Our actions in 2021 to enhance monetary and financial stability in the UAE supported the competitiveness, diversity and growth of our financial sector. We reinforced our infrastructure with the Dirham Monetary Framework to improve liquidity management and forecasting, instilling confidence and trust in the UAE’s financial system. ESG Financial Sector Surveillance Initiative H.E Ebrahim Obaid Al Zaabi Assistant Governor - Monetary Policy and Financial Stability. 8. MEASURES TO STRENGTHEN THE RESILIENCE OF THE UAE FINANCIAL SYSTEM The CBUAE is mandated to promote financial stability in the UAE, since a stable and reliable financial system is a precondition for sustainable economic growth. The impact of the COVID-19 pandemic brought significant challenges for the financial system, and the economy more broadly. The CBUAE conducted risk assessments, scenario-based stress-testing and macro-financial analysis covering the entire UAE financial system, and addressed identified vulnerabilities through appropriate measures. The pandemic highlighted the importance of preventative steps to enhance the resilience of the financial system, and CBUAE’s crisis readiness to respond promptly to any potential crises. Financial System Surveillance The CBUAE conducted analyses on global and domestic financial stability risks, and implemented measures to mitigate those risks. This financial surveillance included a comprehensive analysis of the UAE banking sector and non-bank financial institutions. Overall, the UAE banking system remained resilient, with the main key soundness indicators rebounding to pre-pandemic levels. The focus on asset quality in the banking sector and related recommendations supported the stabilisation of non-performing loans during the second half of the year. Further assessments covered the pandemic’s repercussions for the UAE financial system, and the calibration of a gradual, balanced exit strategy from the CBUAE’s emergency measures implemented during the pandemic. An enhanced framework for bank real estate exposures, implemented during the year, will further improve the measurement and oversight of real estate financing in the UAE. Stress Testing and Modelling In 2021, the CBUAE finalised the bottom-up stress test, focussing on exploring potential vulnerabilities in the UAE banking sector amid the COVID-19 pandemic. The hypothetical adverse scenario was anchored in a double-dip recession, triggered by new waves of the COVID-19 virus, which transmitted downside risks to the UAE GDP growth rate, oil price, and capital and housing markets. As part of the stress test, the CBUAE initiated a stocktaking survey on climate risk to raise risk awareness in the UAE banking sector, and a liquidity risk survey to assess and enhance liquidity risk stress testing methodologies. The results will be published in the 2022 Financial Stability Report. In addition, the CBUAE continued its frequent topdown stress tests to evaluate the impact of COVID-19 shocks to the UAE economy and the banking sector. The tests’ aims were to measure potential disruption caused by new waves of the pandemic, and the effect this would have on UAE banks’ capital and liquidity buffers. The results showed that the UAE banking sector would be able to withstand the considered scenarios while maintaining adequate capital and liquidity levels, thanks to the financial resilience built before the pandemic. Macroprudential Framework The pandemic highlighted the importance of the CBUAE’s macroprudential policy – that is, policy to enhance the resilience of the financial system and counteract systemic risk by accumulating capital and liquidity buffers to be used in times of stress. The focus included annual designation of the UAE’s Domestic Systemically Important Banks (D-SIBs). The CBUAE designated as systemically important the same four banks as the previous year – First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank. To ensure a higher level of loss absorption capacity, banks designated as 59
35. Central Bank of the UAE ANNUAL REPORT 2021 D-SIBs are subject to higher capital requirements (D-SIB capital buffer) and more intensive supervisory scrutiny. In response to the pandemic, banks were allowed to use 100% of their D-SIB buffer as part of the CBUAE’s targeted measures to support the UAE financial system and economy. 10. NEW INSTRUMENTS IN THE MANAGEMENT OF THE UAE MONETARY MARKET 9. CBUAE ENFORCEMENT ACTIONS ACROSS SECTORS The rollout of the new Dirham Monetary Framework (DMF) gathered pace through 2021, in line with the CBUAE’s monetary policy objectives, aiming to foster money market development in the UAE. This framework for the CBUAE’s operations in the UAE Dirham money markets is geared towards the overriding monetary policy objective of maintaining the peg of the UAE Dirham to the U.S. Dollar, while also fostering capital market development in the UAE. The CBUAE took robust measures on enforcement in 2021. Action focused on shortcomings in the Anti Money Laundering (AML) and Sanctions Compliance Framework across the financial services industry, and the failure of some money transfer (hawala) providers to register on the required reporting systems in a timely manner. The CBUAE also imposed administrative and financial sanctions for matters related to solvency, liquidity, consumer protection and Emiratisation17. The CBUAE also introduced new procedures to enforce compliance with the requirement of the OECD’s Common Reporting Standard (CRS) of 2014, by imposing penalties on Reporting Financial Institutions and their customers (account holders and controlling persons, in the case of trusts). The CBUAE is committed to strict compliance with the CRS, in line with the applicable UAE Cabinet Resolution of 2016 on the global fight against tax evasion. Additionally, the Strict Liability Violations Regulation was finalised in 2021, allowing the CBUAE to impose automatic fixed penalties for late reporting, or non-reporting. UAE enforcement action: 2021 Institution type Penalties (AED) Number of institutions sanctioned Additional non-monetary sanctions Banks 45,758,332 12 1 remediation programme Exchange Companies 19,863,000 14 3 licences revoked 300,000 5 4 cautions issued N/A 1 1 licence revoked Hawaladars Financial intermediaries IMF Technical Assistance in Liquidity Management and Forecasting Instruments Monetary Bills (M-Bills) The CBUAE launched a new securities issuance programme in early 2021 to LFIs and eligible investors, known as Monetary Bills (M-Bills). Dirham Overnight Index Average (DONIA) The following steps were taken towards the implementation of the new DMF through the year: This serves three key DMF purposes: ● to provide banks with a high-quality tradable instrument denominated in local currency; and ● to provide the basis for determining the short end of a local currency-denominated yield curve. To date, this programme has made good progress; M-Bills have now replaced the previous Certificates of Deposit programme. On 31 December 2021, the amount of outstanding M-Bills totalled AED 108.3 billion. A nascent secondary market has also emerged, with M-Bills dealers quoting two-way pricing, and trades taking place outside primary distribution. The CBUAE expects such trends to continue to gain momentum, as other DMF aspects are rolled out. 60 The CBUAE introduced new liquidity insurance and liquidity provision facilities, while also improving existing facilities. This included the introduction of an Intraday Liquidity Facility, to provide eligible counterparties access to Dirham liquidity to ensure that payments are settled on a real-time basis, and to increase payment efficiency through the UAE Funds Transfer System. The CBUAE engaged the International Monetary Fund for technical assistance related to liquidity management and forecasting. The result of the mission saw a start-of-the-art liquidity forecasting framework developed for the CBUAE, utilising the latest advances in statistical literature, and the development of a more robust approach to calibrating the optimal structural liquidity surplus for the banking system. The mission also resulted in other recommendations related to more effective DMF implementation on open market operations and organisational requirements and processes. Practical implementation of the Technical Assistance mission’s recommendations are ongoing, and will enhance the CBUAE's approach to monetary policy implementation significantly in the coming years. In order to achieve this, the framework consolidates liquidity facilities to ensure that domestic money market rates align to prevailing U.S. levels in support of the foreign exchange peg. This provides a clear distinction between standing facilities and open market operations to improve the CBUAE’s capacity to manage liquidity, and creates incentives for banks to manage their day-to-day liquidity stance proactively and to support money market development and collateralisation in the UAE. ● to absorb structural excess liquidity in the banking system; 17 Intraday Liquidity Facility The CBUAE enhanced the transparency of local money markets through the development and publication of a Dirham Overnight Index Average (DONIA). Daily publication of DONIA, based on actual overnight interbank transactions, provides market participants with data on the overall state of the interbank market, and provides a solid basis for banks in determining their fixings for the Emirates Interbank Offered Rate (EIBOR). Effective from 7 December 2021, the index is published on UAE business days by 0930 UAE time on the CBUAE’s website, and through Bloomberg and Refinitiv Eikon. The CBUAE also publishes the corresponding volume data of the eligible transactions used in constructing DONIA. These measures, alongside those of 2020, have led to a significant improvement in monetary policy implementation and transmission within the UAE. The CBUAE will continue its DMF implementation over the coming year to enhance monetary policy objectives further, and to foster capital market development in the UAE. U  AE law requires financial institutions to ensure that a certain percentage of UAE nationals are employed in their workforce, and that the UAE nationals receive appropriate training through programmes administered by the Ministry of Human Resources and Emiratisation. It imposes penalties for non-compliance. 61
36. Central Bank of the UAE 11 . NEW ACTION ON FOREIGN EXCHANGE RESERVE MANAGEMENT Ensuring prudent management of foreign exchange reserves is one of the CBUAE’s key strategic objectives. This requires that the CBUAE invests its foreign exchange reserves in safe and liquid investmentgrade assets that meet the legal requirement to cover a minimum of 70% of the monetary base. The CBUAE observes the IMF’s Guidelines for Foreign Exchange Reserve Management to ensure that it follows international best practice. The CBUAE’s policy objectives for holding the foreign exchange reserves are to: ● support confidence in its exchange rate policy; ● mitigate disturbances arising from the balance of payments and the domestic banking system; ● facilitate foreign currency transactions with government entities and the local banking system; ● maximise return at an acceptable level of risk. There were four key developments during 2021: ● The CBUAE implemented the Strategic Asset Allocation (SAA), approved by the CBUAE Board of Directors in November 2020 along with a new Investment Policy. Implementing the SAA resulted in a broad diversification of assets into major bond markets, tranching assets into portfolios with different timescales and investment objectives. ● The Board has set a risk budget that defines the maximum risk and reference portfolios against which the assets are measured and invested. ● A new reserve adequacy assessment framework came into operation. This aligns directly with the Board’s liquidity/risk appetite, to ensure that the CBUAE always has sufficient liquid assets during times of crisis. ● The CBUAE’s diversified corporate bond allocation aims to observe ESG principles. In 2022, the CBUAE plans to engage external fund managers. It will continue to manage its reserves in accordance with its fundamental aim of ensuring operational excellence and prudent reserve management, guided by international best practice. 62 ANNUAL REPORT 2021 12. IMPROVING UAE PAYMENT SYSTEMS The CBUAE owns and operates most of the UAE’s systemically-important payment systems. It is engaged in several projects to strengthen and diversify domestic payment channels, putting them at the forefront of technological developments in this field. These projects have been conducted in collaboration with banks in other jurisdictions. Measures Taken During the Pandemic The CBUAE took measures during the pandemic to ensure the continued functioning of payment systems that it operates or manages. It strengthened the Instant Payment Instructions (IPI) channel, enabling fund transfers on a 24-hour basis, and the window for processing cheques through the Image Cheques Clearing System (ICCS), to accommodate access to payments infrastructure during the movement restrictions under the National Sanitation Programme to deal with COVID pandemic. The CBUAE waived all payment systems charges, and increased the threshold for Tap & Go POS transactions from AED 300 to AED 500 to allow easy processing, reduce waiting time and avoid the spread of viruses. It also reduced the Interchange Reimbursement Fees (IRF) for debit cards’ POS transactions, with the expectation that the lower costs would be passed to merchants, and ultimately, to their customers. The CBUAE also allowed exchange houses to process international remittances for customers under the Wages Protection System (WPS). Advancing the National Payment Systems Strategy The CBUAE began moves to launch the national Instant Payment Platform (IPP), part of the National Payment Systems Strategy (NPSS) developed to ensure safe and convenient electronic payments to reinforce the UAE’s place as a leading cashless economy. The platform lays the groundwork to transform the UAE’s financial services ecosystem, providing flexibility to respond to the rapidly-changing payment market and complying with best practice and international standards (including ISO20022). At the CBUAE-hosted Future of Finance conference in Dubai in October 2021, the CBUAE signed an agreement with a consortium of partner companies selected to lead IPP implementation. The first release of the IPP is expected in late 2022. In 2021, we focused on building and strengthening capabilities to address rapidly-changing market requirements for an advanced, robust national payment system. In addition, we bolstered our payments regulatory framework to meet our ambitious vision of modernising the payment ecosystem and enhancing cross-border payment options. We will continue to invest in technology to deliver resilient national payments system platforms which enhance customer experience, boost financial inclusion and help to develop a cashless society. Dr. Sabri Hamed Al Azazi Assistant Governor - Support Services and Operations Regulatory Policy Framework for UAE Payment Systems The CBUAE developed a regulatory policy framework to cover existing and evolving payment systems, products and services. Specifically, the CBUAE issued four regulations (covering Stored Value Facilities, Retail Payment Systems, Large Value Payment Systems, Retail Payment Services and Card Schemes). The regulations’ main objectives are to: ● enhance the licensing regime for Stored Value Facilities; ● establish a designation regime for large value clearing and settlement systems and retail payment systems, enabling the CBUAE to designate such systems to be subject to its oversight; ● develop an activity-based approval regime for other retail payment activities, such as payment card issuing, merchant acquiring and cryptorelated activities, allowing the CBUAE to regulate such activities in a proper manner. Preparations to Join GCC-RTGS and Buna In 2021, the CBUAE passed all milestones to ensure its readiness to join the Gulf Payments Company’s Arabian Gulf System for Financial Automated Quick Payment Transfer, known as AFAQ. Launched in December 2020, AFAQ connects the central bank payment systems in GCC countries, enabling the processing of cross-border transactions in GCC currencies. The CBUAE also worked closely with Buna, the Arab Monetary Fund platform that allows central banks and commercial banks in the Arab region to process, clear and settle their cross-border transactions using their domestic currencies. The UAE Dirham will ultimately be used as a settlement currency in both systems, which will increase reliance on the Dirham outside the country. Use of the Dirham in regional and international business will relieve the pressure on economic operators in the UAE to secure large liquidity in foreign currencies for their crossborder transactions. Compliance with International Standards in Payment Systems In 2021, the CBUAE undertook its annual assessment of its payment systems to ensure compliance with the PFMI international standard. This took into consideration the Large Value Payment System (LVPS) and Retail Payment System (RPS) regulations issued in the first quarter of 2021. The report concluded that the implementation of compliance measures was progressing well, in line with the CBUAE’s action plan. CBUAE cooperation with other Central Banks In 2021, the CBUAE signed a MoU with Bank Indonesia to promote cooperation on payment systems and digital financial innovation. The CBUAE also entered into a currency Swap agreement with the Bank of Korea, and renewed its Swap agreement with the Reserve Bank of India. These agreements facilitate transactions involving the purchase and sale, and subsequent repurchase and resale, of the foreign currency against AED, and of AED against the foreign currency. The aim is to foster a wider scope of mutual trade and investment opportunities for economic operators in the two countries, and to support the development of bilateral financial market operations. 63
37. Central Bank of the UAE 13 . DIGITAL TRANSFORMATION: FINTECH SECTOR INITIATIVES The CBUAE is currently undertaking digital transformation steps to enhance the financial system and associated digital infrastructure to facilitate innovation and improve competitiveness in the UAE. It has identified several digital transformation initiatives to implement in 2022-23, some of which are already underway, the most important of which are set out below. ANNUAL REPORT 2021 Figure 9: The mBridge CBDC Open Finance: Creating a Secure Data-sharing Environment People’s Republic Of China Hong Kong SAR, China PRC Corp HK Corp PRC Bank Figure 10: The CBUAE’s Open Finance framework HK Bank mBridge Cross-Border Transactions In 2021, the partners developed the mBridge Trail Platform, demonstrating a substantial improvement in processing cross-border fund transfers from an average of 3 to 5 days to near real-time, as well as a significant reduction of the processing and transaction costs involved. The project involves 22 private sector participants currently. It issued three reports in 2021 on the technical architecture, the operating model and 15 potential businessuse cases. The mBridge project’s excellent progress encouraged the CBUAE, BISIH and peer central banks to test the Trail Platform with real business-use cases and transactions, to improve the results further. 64 TRADITIONAL FINANCIAL SERVICES OPEN FINANCE FRAMEWORK Closed Ecosystem - limited data access and sharing, monolithic business model Open Finance Ecosystem - multi-directional data access and sharing, distributed business model, financial institutions as platforms, Finance as a Service (FaaS) fabric TODAY FUTURE UAE Bank Thai Bank UAE Corp Thai Corp CUSTOMERS Building a Multi Central Bank Digital Currency (mBridge) The CBUAE has been actively exploring the potential of Central Bank Digital Currencies (CBDCs), participating in CBDC research and proof-of-concept work over the past two years. Currently, the CBUAE is working with the Hong Kong Monetary Authority, the Bank of International Settlements Innovation Hub in Hong Kong (BISIH), the Bank of Thailand, and the Digital Currency Institute of the People’s Bank of China to develop a Multiple CBDC Bridge - known as the mBridge project – to address the problematic points in conventional cross-border payments. The CBUAE has developed an Open Finance Strategy to ensure an efficient and secure environment for collaboration, financial and product innovation, interoperability and data-sharing among financial institutions and authorised Third Party Providers (TPPs). U.A.E. Thailand CUSTOMERS INSURANCE WEALTH MANAGEMENT GOVERNMENT UAE OPEN FINANCE FRAMEWORK FINTECHS AND NEO-BANKING Total amount tested on the mBridge trial platform* DATA THB 10 AED OR billion 4 1 HKD $ RMB OR billion 2 2 OR billion *Based on World Bank 2019 data. DATA (customer, bank, product) BANKING INSTITUTION REGULATORS The CBUAE’s Open Finance Strategy’s key components aim to: People’s Republic Of China Hong Kong SAR, China ● Establish a robust governance structure to ensure the safety and soundness of the Open Finance operating environment; ● Develop the required Open Finance and platform standards, as well as a strong regulatory framework to ensure efficiency and interoperability, and – most importantly – adequate management and mitigation of all related risks; ● Build a world-class, resilient and secure platform to allow participants to exchange, transact and collaborate in a safe, secure and cost-effective manner; and 11 Including semi-conductors, medical equipment and apparel BANKING INSTITUTION THIRD PARTY PROVIDERS billion Jurisdictions involved Unique industries (customer, bank, product) ASSET MANAGEMENT ● To establish fair dispute-handling procedures and systems to ensure consumer and participant protection. Thailand U.A.E. Export Goods *Transaction values are rounded to the nearest billion. 65
38. Central Bank of the UAE ANNUAL REPORT 2021 Our mission to shape the future of the UAE ’s financial sector gained pace in 2021. We reinforced our digital infrastructure, enhancing both the customer experience and the financial system by facilitating innovation and improving cost efficiencies. In 2022, further FinTech initiatives will accelerate financial inclusion, and develop our round-the-clock banking operations, Open Finance and cloud-based infrastructure. Supported by risk-based advanced analytics and AI-driven supervisory technology, this will reinforce the UAE’s role as a leading regional and global business hub. SME Funding Platform Saif Humaid Hamad Al Dhaheri ● Providing basic credit risk information to banks; Assistant Governor - Strategy, Financial Infrastructure & Digital Transformation Financial Services Cloud Infrastructure To help the financial service sector adopt the latest and most advanced technologies, the CBUAE will work with the financial industry to create Financial Services Cloud Infrastructure. This initiative aims to facilitate the development and operation of a strong and secure cloud infrastructure to support growth and innovation in the financial sector, while ensuring compliance with industry best practice and applicable data confidentiality requirements. Success would make the UAE the centre of excellence in MENA financial cloud services in the future. Guidelines for Financial Institutions Adopting Enabling Technologies The CBUAE, together with SCA, DFSA and the Financial Services Regulatory Authority – collectively referred to as the Supervisory Authorities – issued guidelines in October 2021 for financial institutions adopting enabling technologies, to provide a set of principles and standards for financial institutions developing such innovations. The key principles are to cater to different operating and business models, and financial services offered by existing organisations within the sector, as well as new entrants. It also 66 provides more detailed guidance for institutions, covering Application Programming Interfaces (API), Cloud Computing, Biometrics, Big Data Analytics and Artificial Intelligence (AI), and Distributed Ledger Technology (DLT). Given the difficulty in obtaining SME finance, the CBUAE has worked with multiple partners to develop an operating model for a funding provision platform to link SMEs with funding providers, to support the SME sector and speed up economic growth. The funding platform’s objectives include: ● Providing a low-cost, efficient, robust and secure channel to the SME sector to meet its funding needs; ● Connecting banks with prospective SME borrowers; ● Facilitating credit assessment processes; and ● Ensuring regulatory compliance in the lending process. SupTech and Data Management The CBUAE established its SupTech strategy in 2021 to improve licensing and supervisory processes, and to comply with international standards and requirements. The strategy includes the development of a 360-degree view of licensed financial institutions, use of advanced data analytical tools to identify and analyse all collected data for forward-looking supervisory and risk management purposes, and the establishment of a powerful data warehouse. Fintech Collaboration The CBUAE signed an MOU with the HKMA, which forms a solid foundation for the two jurisdictions to explore several areas of interest jointly, e.g. CBDC, SupTech, and open banking. The CBUAE also organised numerous workshops with Central Banks and authorities, including the Central Bank of Bahrain, the Central Bank of Brazil, the HKMA and the UK Financial Conduct Authority. Domestically, the CBUAE signed MOUs with Dubai International Financial Centre and Abu Dhabi Global Markets at the CBUAE’s Future of Finance Conference in October 2021, to enhance collaboration on FinTech activities, joint projects, talent development, enhancing the UAE’s competitive advantages and digital transformation of the UAE financial sector. Nationwide e-KYC Platform The CBUAE plans to develop a nationwide e-KYC (know your customer) platform to automate, streamline and improve customer onboarding and ongoing due diligence processes for both financial and non-financial institutions, and to enhance financial inclusion. The objectives and benefits of the proposed e-KYC Platform include: ● A reduction of operational costs through automation and increased onboarding efficiency; ● Enhanced regulatory compliance by standardising the basic KYC forms and processes, including verification and authentication using primary data sources (i.e., golden source information); and ● Improved customer privacy and data security by eliminating the need to share private information on multiple unsecure channels. 67
39. Central Bank of the UAE ANNUAL REPORT 2021 The development and application of a Consumer Protection framework have largely contributed to the CBUAE ’s mission by creating a consumer-centric culture in the UAE’s financial services sector. Our industry engagement in 2021, and the CBUAE’s fast response to the COVID-19 pandemic, supported those affected by the pandemic’s repercussions. Once again, this approach identified the CBUAE as a key player in achieving the leadership’s vision. Fatma Aljabri Assistant Governor - Financial Crime, Market Conduct and Consumer Protection. 14. STRENGTHENING CONSUMER PROTECTION In accordance with the core objective of strengthening consumer trust in the financial system, the CBUAE developed principles-based regulations on consumer protection in January 2021. These set out regulatory expectations on disclosure, product oversight, market conduct, customer choice, indebtedness and privacy to which LFIs must conform, and defined a range of institutional obligations for the protection of consumers. The CBUAE is legally mandated by the Decretal Federal Law No. 14 of 2018 to establish these regulations for the protection of LFIs’ customers. Consumer Protection Standards and SME Market Conduct Regulations Following the release of the Consumer Protection Regulations in January 2021, the CBUAE released its Consumer Protection Standards document, which detailed the regulation’s requirements on disclosure and transparency, institutional oversight, market conduct, protection of consumer data and assets, financing practices, complaint processes and resolution, consumer education and awareness, financial inclusion and Shari’ah compliance. The Standards form part of the Customer Protection Regulations, and are thus obligatory for all LFIs. In January 2021, the CBUAE also issued its Small to Medium-Sized Enterprises (SME) Market Conduct Regulation, a series of standards to promote a culture within LFIs to improve SME access to banking facilities 68 and ensures fair and appropriate market conduct practices. These Regulations address specific issues, such as strengthening oversight on the design and sale of financial products and services, ensuring that LFIs provide effective disclosure to SME customers on matters affecting their decision to purchase products and services, providing mechanisms for redress of complaints, and ensuring SME customers have access to appropriate debt counselling. Market Conduct Compliance The CBUAE established a dedicated unit to oversee the progress of consumer protection regulations, including market conduct monitoring and guidance. This allowed the CBUAE to conduct thematic reviews on consumer concerns, and remediate a number of non-compliance incidents. Court Case Management System The CBUAE issued a detailed rulebook on the Court Case Management System (CCMS) in 2021, setting out the roles and responsibilities of all participating parties (courts, LFIs and CBUAE). Its aim is to ensure the system’s efficient and streamlined operation; court orders are issued to LFIs quickly, benefitting LFIs and consumers. The CCMS was also integrated with the Abu Dhabi Judiciary Department, in what is expected to be a model for linking other entities with judicial departments across the UAE. This integration has helped to reduce the time and resources required to process cases, including the elimination of typing errors caused by manual entries. 15. MANAGING CYBERSECURITY AND OTHER OPERATIONAL RISKS The CBUAE conducted initiatives to improve risk readiness across several sectors, including information security, cyber-security and other operational risks posed by pandemic threats to the health of staff, and the availability of confidential means for whistle-blowers to express their concerns. First Cyber War-gaming Exercise The CBUAE and UBF conducted their first cyber war-gaming exercise, a simulation drill designed to test the UAE banking sector’s cyber-resilience, as well as to strengthen its ability to deal with increasingly sophisticated cyber-attacks. During the exercise, the participating banks responded to a simulated cyber-attack, with attack paths depicted in real-time. Technical team members from different banks were challenged to respond to real-life scenarios by detecting and responding to various threats. Management and executive management team members had to collaborate, apply their respective cyber-response strategies, and to take quick decisions at critical moments. The exercise resulted in a review of current measures and processes to ensure preparedness, an update to critical documents, upgrading the information technology infrastructure and cyber-security capabilities, and – more broadly – a stronger awareness at the sectoral level on how to respond specifically in the area of communication. Safeguarding the CBUAE’s Operational Resilience During the COVID-19 Pandemic The CBUAE addressed the risks that the COVID-19 pandemic posed to the health of CBUAE staff, collaborating partners, and visitors while continuing to perform all its critical functions. It based its reaction on its business continuity and crisis management plans to safeguard the organisation’s internal resilience. The CBUAE also conducted yearly IT DR drills and BCP simulation exercises remotely, testing critical applications accordingly. Whistle-blowing Portal Following its commitment to uphold the highest standards of integrity and transparency, the CBUAE launched a new whistle-blowing portal in 2021. This encrypted channel allows internal and external stakeholders to raise concerns anonymously that are related to misconduct or policy violations by CBUAE employees, contractors and representatives. The launch of the whistle-blowing portal is part of the CBUAE’s efforts to promote compliance with the CBUAE Code of Conduct and the highest governance standards. It also aims to address alleged illegal and unethical practices by taking prompt, necessary action. Located on the CBUAE website, the portal allows employees and external stakeholders (financial institutions, vendors and the public) to voice their concerns without the fear of reprisal. It also allows comprehensive information-sharing on relevant issues, including attaching files and documents in support of a particular claim. The whistle-blowing portal is at: https://eservices.centralbank.ae/wb Risk and Performance Analytics System to Support Foreign Reserves Management The CBUAE began implementation of a robust risk analytics, performance measurement and attribution system to support its new reserves investment policy. Its objective is to enable risk managers and portfolio managers to monitor risk analytics to ensure the reserves portfolio remains within authorised guidelines. The system also includes performance measurement and attribution analysis to help portfolio managers understand the sources of portfolio returns, both absolute and relative, and provides various ex-post and ex-ante statistics to support the CBUAE in fulfilling the reserves’ purpose. 69
40. Central Bank of the UAE Governance Risk Compliance Tool as a Central Repository for NonFinancial  Risks The CBUAE implemented a state-of-the-art integrated risk governance and compliance (GRC) tool as part of its vision to enhance its risk management framework, and to automate the CBUAE’s day-to-day risk management activities. The project aims to automate GRC actions across the CBUAE in a more efficient, streamlined and integrated manner and to have a single automated source of information for non-financial risks in the following areas: ● Banking and insurance operations; ● Information security; ● Compliance; and ● Business continuity. It also aims to provide real-time updates and notification of material incidents, and advanced monitoring and reporting of the non-financial risks in all CBUAE operations. ISO Certifications The CBUAE implemented the ISO 27001 framework successfully, strengthening the organisation and improving the efficiency of its core and support functions. It obtained ISO certification in five areas: ● Information Security Management System (ISMS) based on ISO 27001:2013 ● Quality Management ISO 9001:2015 ● Business Continuity ISO 22301:2019 ● Information Technology Services ISO/IEC 20000-1:2018 ● Integrated Management System PAS 99:20 70 ANNUAL REPORT 2021 16. INVESTING IN PEOPLE: CREATING A PERFORMANCEBASED CULTURE The CBUAE is committed to creating a talent-centric, transparent and proactive working culture to the best global standards, in which all employees can achieve their full potential. It has a long-standing policy of investing in its people to enhance its work culture and business performance. In 2021, the CBUAE undertook a broad range of strategic measures, aligned with its values, to deliver an integrated people strategy and create a working environment that fosters collaboration and delivers business results, in alignment with its overall organisational vision, mission and strategy. Key senior leadership appointments in the first half of the year helped the CBUAE to deliver its ambitious mandate, in alignment with the new CBUAE Targeted Operating Model (TOM). It reviewed its organisational structure, and underwent a comprehensive restructuring exercise to reflect and cascade the new mandate through the organisation. Following the Insurance Authority’s merger with the CBUAE at the beginning of 2021, over 120 IA employees joined the CBUAE family, leading to extensive co-location and onboarding efforts to facilitate the integration and transformation process. The CBUAE attracted 39 new employees in 2021 from local and international markets, 41% of whom were recruited into managerial level positions. It also hired key executive leaders to support its transformational projects and new initiatives. The CBUAE maintained a presence at the largest career fair in Dubai in November 2021 to attract Emirati jobseekers interested in the banking sector. By the end of 2021, the CBUAE had 699 staff, raising its Emiratisation rate to 65.2%. The human resource elements of the CBUAE’s strategic plan include building organisational capabilities and skill sets to create a workforce ready for the future. The plan prioritises strategic talent management initiatives to contribute to its sustainable long-term growth and business continuity, and to ensure that it can identify, develop and retain talent with the right capabilities to achieve its future business goals. In recognition of the capability and commitment of its internal talent, the CBUAE endorsed the first promotion cycle since 2019 for over 85 employees, facilitating their career progression and continuous professional development. In January 2021, the CBUAE launched its Executive Certificate for Risk-Based Supervision Professionals - a customised certificate programme designed specifically around CBUAE requirements to provide insight into latest international best practice in risk-based supervisory skills and knowledge. The programme was developed in cooperation with the Institute of Bankers (IOB), part of University College Dublin and a leading training institute for bankers and bank supervisors, which also accredited the qualification. The CBUAE’s Youth Council has established itself as a significant platform for Emirati Youth representation, collaboration and ambassadorship within the banking and financial sector. Throughout the year, the Youth Council launched a number of internal and external initiatives, including the CBUAE Youth Dialogue, a biannual internal event bringing CBUAE youth together with the Senior CBUAE Leadership team. Externally, the Youth Council hosted multiple workshops in collaboration with Abu Dhabi Youth Hub, aimed at raising financial literacy awareness amongst young Emiratis. To foster a culture of productivity, engagement and wellbeing, the CBUAE launched its first integrated Human Resource Management System (HRMS) to lay the foundations for efficient delivery of peoplecentred services enhancing the overall employee experience at the CBUAE. During 2021, the CBUAE enhanced its employee policies to drive performance, advocate fairness and promote work flexibility for employees. A comprehensive human resource policy review resulted in an increase in leave benefits and entitlement for maternity, paternity and compassionate leave, in line with best practice. To promote a culture of autonomy, social well-being and adaptability to change, the CBUAE also introduced a new remote working policy, with flexible working hours to allow employees to decide where and when they work most effectively. The CBUAE launched an internal campaign called ‘Everyone Matters’ to spread awareness and communicate policy changes to employees, and – in tune with the UAE government’s efforts to promote work-life balance and enhance productivity – the CBUAE introduced a four and a halfday working week from 1 January 2022. 17. KEEPING THE PUBLIC INFORMED: CBUAE COMMUNICATIONS IN 2021 In light of the ongoing pandemic, the CBUAE was particularly attentive to the need to keep the public informed of its support for the UAE’s financial system. Accordingly, the CBUAE maintained a steady stream of press releases to inform stakeholders about its ongoing supervision of the nation’s financial system. These public statements often accompanied CBUAE instructions to LFIs: examples include details of how the CBUAE’s Targeted Economic Support Scheme would taper off as the crisis receded, and a new CBUAE framework for banks’ management of their exposure risk to the real estate sector. The CBUAE conducted a review of crisis handling and management procedures from a communications standpoint, to ensure that it is prepared to address future challenges, taking into consideration the relevant national guidelines set by the National Emergency Crisis and Disasters Management Authority (NCEMA). The CBUAE’s senior management worked to ensure that staff across the entire organisation were fully aware of ongoing business and safety initiatives regarding the pandemic. Events: Physical and Hybrid The second half of 2021 witnessed the transition from a world of meetings, launches and conferences held on Zoom, Teams and other virtual platforms, back to the opportunity for participants to attend selected events in person. The CBUAE held its Future of Finance conference at Expo 2020 Dubai in October 2021, shortly after the formal Expo opening, which featured keynote speeches from leading Emirati and international figures on financial issues affecting the UAE and its stakeholders. During the conference, the CBUAE also signed an agreement to boost the UAE’s financial infrastructure, as well as hosting discussions on financial sector topics in five themed groups, covering digitalisation, green finance, central bank digital currencies, Islamic finance and the instant e-payment options. 71
41. Central Bank of the UAE ANNUAL REPORT 2021 FINANCIAL REPORTING 03 BALANCE SHEET The CBUAE balance sheet grew by 11 % in 2021, mainly due to net inflows in the local economy. The asset composition was impacted by the implementation of a new reserve management policy, and the consequent movement from cash and other short-term investments into longerdated bonds and other listed instruments. The implementation of the new Dirham monetary policy led to a marked increase in the outstanding M Bills. Equity fell due to the weakness in the international financial markets. 72 73
42. Central Bank of the UAE ANNUAL REPORT 2021 BALANCE SHEET OF THE CBUAE APPENDIX 2021 AED ’000 2020 AED’000 FIGURES ASSETS Annual CPI Inflation in Selected Economies Figure 1.2 Commodity Prices Figure 1.3 Policy Rates in Selected Economies Figure 2.1 UAE Current Account Balance Figure 2.2 UAE Hydrocarbon Exports 267,074,023 332,235,835 Deposits 42,229,708 44,802,363 Derivative financial instruments 14,806,074 6,901 2,135,800 30,246,918 47,340,673 48,053,099 Figure 2.3 UAE Trade Balance 113,932,995 1,861,403 Figure 2.4 UAE Financial Account Balance Investment at fair value through profit and loss 20,529,251 - Figure 2.5 Nominal and Real Effective Exchange Rates Gold bullion 11,912,635 12,862,335 Figure 3.1 UAE PMI Index Property and equipment 618,677 168,677 Figure 3.2 Average UAE Crude Oil Production Other assets 986,515 273,976 Figure 3.3 Average Dubai Residential Unit Sale Prices 521,566,351 470,511,507 Figure 3.4 Abu Dhabi Residential Prices Figure 3.5 Headline, Tradable and Non-Tradable Inflation Figure 3.6 General Government Revenues Figure 3.7 General Government Expenses Figure 3.8 Fiscal Stance Cash and balances with banks Loans and advances Investments at amortised cost Investments at fair value through other comprehensive income TOTAL ASSETS LIABILITIES AND EQUITY LIABILITIES Current accounts and deposits 214,427,967 192,046,104 Certificates of deposit and monetary bills 164,728,171 129,325,000 Currency issued 111,815,394 110,703,812 Figure 4.1 Monetary aggregates in 2021 Derivative financial instruments 155,718 7,465,080 Figure 4.2 EIBOR and LIBOR Rates Deferred grant 313,707 - Figure 4.3 Spread of 3-month EIBOR vs. 3-month USD LIBOR Other liabilities 3,955,703 3,685,987 Figure 4.4 10-year Interest Swap Rates 495,396,660 443,225,983 Figure 5 Beneficiaries of the TESS deferral program  Figure 6 CBUAE’s TESS Gradual Exit Strategy  Figure 7 CBUAE Objectives Figure 8 An overview of the risk-based supervision actions taken by the CBUAE Figure 9 The mBridge CBD Figure 10 The CBUAE’s Open Finance framework  TOTAL LIABILITIES EQUITY 20,000,000 20,000,000 6,013,301 5,234,580 Fair value reserve 31,722 2,050,944 Retained earnings 124,668 - 26,169,691 27,285,524 521,566,351 470,511,507 Fully paid-up capital General reserve TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 74 Figure 1.1 75
43. Central Bank of the UAE ANNUAL REPORT 2021 LIST OF ABBREVIATIONS TABLES 76 ADNOC Abu Dhabi National Oil Company ADX Abu Dhabi Securities Exchange AE Advanced Economies AED United Arab Emirates Dirham AI Artificial Intelligence AML Anti Money Laundering UAE Balance of Payments Estimates AML /CFT Anti Money Laundering and Combating the Financing of Terrorism Table 3.1 Annual Real GDP Growth Rates in the UAE AMLex AML/CF Risk Assessment Tool Table 3.2 CPI Inflation AMLSCU Anti Money Laundering and Suspicious Case Unit Table 3.3 UAE Consolidated Government Finances API Application Programming Interfaces Table 4.1 ASRR Advances to Stable Resources Ratio Money supply in the UAE BIS Bank of International Settlements Table 4.2 Total Deposits at UAE Banks BISIH Bank of International Settlements Innovation Hub in Hong Kong Table 4.3 Assets and Credit at UAE Banks BOP Balance of Payments Table 4.4 Domestic Credit by Economic Activity CAR Capital Adequacy Ratio Table 4.5 UAE Financial Soundness Indicators CBUAE the Central Bank of the UAE Table 4.6 Number of Licensed Insurance Companies and Related Insurance Professions CBDC Central Bank Digital Currency CCB Capital Conservation Buffer Table 4.7 Key Financial Indicators of the Insurance Sector CCMS Court Case Management System Table 4.8 Early Warning Ratios for Insurance Companies CCR Counterparty Credit Risk Table 4.9 UAE Securities Markets CCyB Countercyclical Capital Buffer Table 4.10 UAE-Sovereign Credit Default Swap CDS Credit Default Swaps CDs Certificates of Deposit CET1 Common Equity Tier 1 (CET1) Capital CF Countering the Financing of Terrorism CIBAFI Council for Islamic Banks and Financial Institutions CIF Cost of Insurance and Freight COP28 The 28th Conference of the Parties CPI Consumer Price Index CRS Common Reporting Standard CRWA Credit Risk Weighted Assets CVA Credit Valuation Adjustment DDS Direct Debit System DFM Dubai Financial Market DLD Dubai Land Department DLT Distributed Ledger Technology Table.1.1 Real GDP Growth in Selected Countries/Groups Table 1.2 Real GDP Growth Rates in the GCC countries Table.1.3 Annual average CPI in GCC Countries Table 2.1 Major UAE Non-Oil Export Partners Table 2.2 Major UAE Import Partners Table 2.3 77
44. Central Bank of the UAE ANNUAL REPORT 2021 LIST OF ABBREVIATIONS 78 LIST OF ABBREVIATIONS DMF Dirham Monetary Framework IFIs International Financial Institutions DNFBPs Designated Non-Financial Businesses and Professions IFRS International Financial Reporting Standard DONIA Dirham Overnight Index Average IMF International Monetary Fund D-SIB Domestic Systemically Important Bank IPI Instant Payment Instructions DSP Digital Supervisory Platform IPP Instant Payment Platform ECB European Central Bank IRF Interchange Reimbursement Fees ECDD Enhanced Customer Due Diligence ISMS Information Security Management System ECQ Effective Compliance Questionnaire IOSCO International Organization of the Securities Commissions EIA US Energy Information Administration LCR Liquidity Coverage Ratio EIBOR Emirates Inter-Bank Offer Rate LFI Licensed Financial Institution ELAR Eligible Liquid Asset Ratio LIBOR London Inter-Bank Offer Rate EMDE Emerging Markets and Developing Economies LSRR Lending to Stable Resources Ratio ESG Environmental , Social, and Governance LTD Loans to Deposits FATF Financial Action Task Force LVPS Large Value Payment System FCSC Federal Competitiveness and Statistics Centre M1 Money Aggregate 1 FDI Foreign Direct Investment M2 Money Aggregate 2 Fed Federal Reserve M3 Money Aggregate 3 FI Financial Institutions Mb/d. Million Barrels per Day FIU Financial Intelligence Unit M-Bills Monetary Bills FMI Financial Market Infrastructure MCR Minimum Capital Requirement FOB Free on Board MECA Middle East and Central Asia FOMC Federal Open Market Committee MENA Middle East and North Africa FSAP Financial Sector Assessment Program MENAFATF Middle East and North Africa Financial Action Task Force G-20 Group of Twenty MENAP Middle East, North Africa, Afghanistan and Pakistan GCC Gulf Cooperation Council MER Mutual Evaluation Report GDP Gross Domestic Product MGF Minimum Guarantee Fund GRC Governance Risk and Compliance MoF Ministry of Finance GREs Government Related Entities MOHRE Ministry of Human Resources and Emiratisation GWP Gross Written Premiums MOU Memorandum of Understanding HAS Higher Shari’ah Authority MSMEs Micro, Small and Medium Enterprises HKMA Hong Kong Monetary Authority NAMLCFTC National Anti Money Laundering & Combating Financing of Terrorism Committee HRMS Human Resource Management System NCEMA National Emergency Crisis and Disasters Management Authority HQLA High Quality Liquid Assets NEER Nominal Effective Exchange Rate ICAAP Internal Capital Adequacy Assessment Process NPSS National Payment Systems Strategy ICCS Image Cheque Clearing System NSFR Net Stable Funding Ratio ICFR Internal Controls over Financial Reporting OPEC Organization of Petroleum Exporting Countries ICP Insurance Core Principals OTC Over-the-counter ICV In-Country Value 79
45. Central Bank of the UAE ANNUAL REPORT 2021 LIST OF ABBREVIATIONS 80 PCE Private Consumption Expenditure PFMIs Principles on Financial Market Infrastructures PMI Purchasing Managers Index PMO Project Management Office Q-o-Q Quarter on Quarter RBI : Reserve Bank of India RBS Risk Based Supervision REER Real Effective Exchange Rate RPS Retail Payment System RWA Risk Weighted Asset SA Standardized Approach SAA Strategic Asset Allocation SA-CCR Standardized Approach for Counterparty Credit Risk SAMA Saudi Central Bank SCA Securities and Commodities Authority SCR Solvency Capital Requirement SDR Special Drawing Right SIA Signals Intelligence Agency SME Small and Medium-sized Enterprises STR Suspicious Transaction Report TCQ Technical Compliance Questionnaire TESS Targeted Economic Support Scheme TOM Targeted Operating Model TPP Third Party Providers UAE Switch UAE Electronic Switch UAE United Arab Emirates UAEDDS UAE Direct Debit System UAEFTS UAE Funds Transfer System UK The United Kingdom UK-FIU UK Financial Intelligence Unit US The United States USD United States Dollar VaR Value at Risk VAT Value Added Tax WEO World Economic Outlook WPS Wage Protection System Y-o-Y Year-on-Year Head Office Central Bank of the UAE, King Abdullah Bin Abdul-Aziz Al Saud Street P. O. Box 854, Abu Dhabi. United Arab Emirates Dubai Sharjah Ras Al Khaimah 26th Street, Bur Dubai P. O. Box 448, Dubai United Arab Emirates King Abdul Aziz Street, Sharjah Industrial Area, P. O. Box 645, Sharjah United Arab Emirates Al Muntasir Road, P. O. Box 5000 Ras Al Khaimah United Arab Emirates Fujairah Al Ain Hamid Bin Abdullah Road P. O. Box 768 Fujairah United Arab Emirates Ali Bin Abi Talib Street P. O. Box 1414 Al Ain United Arab Emirates 81