All banking executives sitting on the boards of directors of the UAE’s top banks are to face more scrutiny and will undergo a 'fitness test' to assess their expertise, the UAE central bank governor announced on Tuesday.
Under new rules, all commercial banks must seek the central bank’s approval when nominating members to boards of directors to ensure their independence, to avoid any potential conflict of interests among members and to prevent individual directors dominating proceedings.
"A sound board of directors governance would require the independence of the board of directors. This includes the absence of subordination of one member to another member, the absence of close family relationships between members and the absence of overlapping interest links," central bank governor Sultan Nasser al-Suweidi said in a speech.
"The existence of such links is likely to create dissenting blocs within the board. Soon, this gives rise to disagreements that will leak out to the staff and create alliances to the blocs within the board, thereby undermining the decision-taking process and weakening the institution," he added.
The governor’s comments came as it was announced that all senior executives of the country’s main banks are to face a business 'fitness test' to see how experienced they are.
"This test is focused on ensuring that such officers do have the required technical expertise, including expertise in risk assessment and risk management, which proved essential in the wake of the recent international financial crisis," Al-Suweidi said.
The central bank issued rules on the operations of banks' boards in 2000; it added rules to protect the rights of small investors in banks last year. Suweidi did not detail how the test for senior executives would work.
The test for bankers comes as Fitch Ratings said in December it believes that the weak global economy and slowdown in Abu Dhabi will represent "new headwinds" for the UAE banking system.
The rating agency said the UAE operating environment was "not immune" to global issues while ongoing problems in Dubai government-related entities would "continue to pose significant asset quality challenges for the sector".
Fitch said is expected several key economic sectors, such as trade, tourism and services to be negatively impacted.
Total bank deposits in the UAE increased 1.5 percent during December 2011 to around AED1.069bn (US$291m), while total bank loans fell slightly, according to figures from the UAE Central Bank released earlier this month.
Total bank loans and advances decreased 0.3 percent to AED1.071bn and total bank assets fell 0.6 percent to AED1.662bn at the end of December, official news agency WAM reported.
Total lending of the 51 local and foreign lenders operating in the second-largest Arab economy rose 4.2 percent to AED1.07 trillion ($291bn) in the first 11 months of last year, central bank data showed. After jumping more than 30 percent a year between 2005 and 2008, credit growth at UAE banks dropped to 1.3 percent in 2010.