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UAE's banking regulator finds the industry resilient enough and the economy poised for higher growth during 2021-22. Image Credit: Gulf News

Dubai: Key solvency and liquidity indicators show the UAE’s financial system amid the COVID-19 pandemic remained robust according to the Central Bank's Financial Stability Report (FSR) for 2020.

CBUAE projects that the UAE economy is expected to gradually recover during 2021 and 2022 from the repercussions of the  pandemic. It expects the UAE GDP to grow by 2.4 per cent in 2021 and 3.8 per cent in 2022 and non-oil GDP to expand by around 4 per cent in both years.

TESS mitigated risks

As per CBUAE’s findings, the Targeted Economic Support Scheme (TESS) has been effective in mitigating risks by ensuring a continued flow of credit, and helping affected individuals and companies overcome temporary debt repayment difficulties. During 2020, the Bank closely monitored asset quality and growth of lending. The Financial Stability Report shows that the UAE banking sector remains resilient, with sustained lending capacity.

“CBUAE has worked tirelessly to ensure that vital sectors of the nation’s economy are able to withstand this crisis," said Khaled Mohamed Balama, the Governor. "CBUAE’s introduction of the Targeted Economic Support Scheme came at the right time, ensuring that banks could mitigate funding and liquidity pressures and maintain their lending capacity.”

The effects of the pandemic resulted in banks’ higher impairment charges, lower operating income and reduced profitability. The aggregate capital and liquidity buffers remain well above the regulatory requirements.

Stress tests

CBUAE conducted frequent top-down solvency and liquidity stress tests by using hypothetical adverse scenarios at different stages of the COVID-19 crisis. The stress tests indicated that the UAE banking system has solid capital and liquidity buffers to withstand significant shocks.

“Our support is ongoing as most support measures provided by CBUAE will remain in place through 2021," said Balama. "Together with the UAE financial sector, we pave the way for gradual economic recovery and remain vigilant towards the challenges ahead, as we continue to uphold the UAE’s financial and monetary stability.”

A separate section of the report is devoted to climate risk, which is at the forefront of regulatory focus. It is important for the UAE banks to consider integrating climate change risk into their lending and operational processes.

Detailed information about payment systems operated by the CBUAE is also featured in the report, as well as the benefits and risks posed by new technologies and cyber-security. It highlights the increased competition from innovative market entrants. Continued focus on those risks is important as the UAE strengthens its role as the largest fintech hub in the Middle East.