Sultan Bin Nasser Al-Suwaidi: The regulatory partnerships for sustained
growth in the MENASA Area
Speech by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United
Arab Emirates, at the MENASA (Middle East North Africa South Asia) Forum, Dubai,
24 May 2010.
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Good Evening,
Excellencies
Ladies & gentlemen
The distinguished panel speakers
It gives me great pleasure to be with you this evening at this important Forum.
The subject of my speech is: "The regulatory partnerships for sustained growth in the
Menasa area".
Under this subject, I will talk about four issues:
First: Implementation of similar banking laws and regulations
Implementation of similar banking laws, using similar banking regulations, and adopting
similar processes in banking supervision in the MENASA Area countries, in my opinion, will
go a long way in providing banking sectors with a strong basis for building on successes. It
will also make regulators realize the importance of regional cooperation and coordination,
which hopefully will lead, at one stage in the future, to enabling cross-border branching of
banks and other financial institutions.
But is it realistic to imagine that cross-border branching of banks and other financial
institutions will be achieved soon?
Another complication is the type of banking institutions that we have in this Area. Most banks
are retail commercial ones, and these are operating in the protected zone. I mean here;
protected through the growing need to protect interests of national banks. So, the question
that comes up; shall the cross-border access of banks be done through a new type of
banking institutions? Which the Area is not familiar with yet.
On implementing of similar banking laws and using similar regulations, I will start here from
the possible regulatory response to the Global Financial Crisis.
The banking regulatory response that countries in the Area might adopt is a mix between
internationally set standards, through decisions of G20 countries and the national
requirements, which might cause slight ring-fencing or insulating of national financial systems
from direct competition.
The Global Financial Crisis might have already impacted the international cross-border
banking business, which might lead to improved regional cooperation and therefore improve
doing banking business, region wise.
Trade related transfers outward and inward will continue to move without much hindrance.
Foreign exchange deals will also go through, as G20 countries are eager to do more trade to
improve their economic conditions. However, there will be some restrictions on investment
flows both outward and inward, because risks have been clearly identified in investment
transactions. Outward flows will be scrutinized by regulators for type of investment and
whether direct or passive. Also complexity of investment products will draw special attention.
As for inward investment flows, regulators will put some type of filters to prevent Hot Money,
or huge inflows followed by quick outflow of funds.
Banking regulations will probably be amended in the coming few months. I believe, the
smaller economy countries will steer their banking system towards lowering the growth rate
of loans and advances plus investments versus stable deposits. Investment banking
business, on the other hand will be subjected to a great deal of more regulations than in the
past.
In summary, I think that the present Global Financial Crisis will impact globalization of
financial services, as many restrictions will be put in place in many countries including the G7
countries, which might open a window of opportunity for countries in our region or the wider
Area.
Second: Cross-border investment flows
Cross-border investment flows should be welcomed by recipient countries and encouraged
by source countries, as many countries in our Area need to set rules to enable the
establishment of large projects for the purpose of creating jobs. That will also enhance peace
and stability on the national level, which will certainly improve the prospects for the regions in
this vast Area. Any help by the World Bank in improving and unifying investment laws in
addition to watching their implementation, will go a long way in achieving this important
regional objective.
Sovereign Wealth Fund source countries should also be interested in investing in mega
projects in the region for three reasons, as follows:
1. The Global Financial Crisis proved that investments through Industrialized
Advanced Countries' investment banks are not totally risk free.
2. There is a need within SWF source countries to safe guard flow of food imports at
reasonable prices, and the possibility for incorporating companies as direct
investment projects in countries in the region is a realistic possibility, when
investment laws are enacted and maintained at international standards.
3. SWF source countries should be interested in the maintenance of social order,
peace and stability in the regions of this Area.
Another reason that makes me think that SWFs from our region might change the flow of
their direct investments, is that once we see the proposed Regulations re Sovereign Wealth
Funds in the Industrialized Advanced Economies start being implemented, when economies
in the West start doing well, more questions will be asked and more forms will become
necessary to fill and more disclosure and transparency will be demanded. This behavior will
signal that there is no strong need for foreign capital in the West, and that the political mood
has changed.
Therefore, we might see gradual tightening of the scrutiny on capital flows from
SWF countries, at one stage, especially funds that are destined for direct investment in
certain companies.
Faced with all this nonsense, SWFs will certainly come to the conclusion that it is time to
change strategy. This could make SWFs avoid direct investment in certain companies, or
even avoid direct investment in all companies, and become more of passive investment
vehicles in the West. As, SWFs have large sums to invest, this might make them direct part
of their investments to existing or newly created companies in the region. This situation, if it
happens soon, will lead to creating a new regional developmental cycle.
Third: Linking regional payment systems
Linking regional payment systems and using local currencies for settlement of transactions
should be a long-term objective for countries in the MENASA Area, as this will improve
speed, efficiency and will achieve transaction cost reduction, for the benefit of cross-border
trade, investment flows and tourism business.
Achieving this would be a big challenge, because the good old routes, which we all are used
to, will have to be abandoned. Also, trust in each other's national currency in addition to trust
in the efficiency of national payment systems across regions is another challenge. However,
these challenges can be overcome over a period of time, maybe depositing of the settlement
amount with the counterpart payment system provider in the recipient country would create
the required trust.
To build trust in national payment systems, it will also be necessary for the national
regulatory authority to take a leadership role. Payment systems on the national level should
be unified into one system, and operate with strict rules for action against mistakes or events
of fraud through members.
To achieve some form of common payment system among MENASA Area Countries, it will
be necessary to:
1. Identify countries that are ready to be linked, through national payment systems that
satisfy certain pre-set standards.
2. Setting-up of a steering committee, consisting of technical staff representing the
national payment systems, who would agree to work on a certain strategy aimed at
achieving a common payment system, that would use local currencies for
settlement, at a future stage.
Forth: Investment in infrastructural projects
Encouraging regional capital flows aimed at investment in infrastructural projects in the
MENASA Area Countries should be encouraged through capital markets.
This could be achieved through allowing corporations that are in marine transportation, air
transportation, rail road companies, road authorities, storage facility companies and
ports/air port authorities to raise money through capital markets in countries of the Area,
especially countries that are capital surplus ones.
The Area can draw on the experience of the UAE in this respect, when it allowed its banking
system to raise money for Indian companies as early as the eighties of last century. Certain
Indian companies were allowed to raise capital against certain commitments and
undertakings. This was possible through the high requirements and standards implemented
in both India and the UAE at that time.
We believe Indian companies were able to benefit from such funds for a long period of time.
Many of such companies are large conglomerates now.
Providing a special window for infrastructural projects will benefit the flow of trade and
investments across regions of the Area, and will help to sustain growth of economies.
Excellencies
Ladies & gentlemen
The distinguished panel speakers
With this I come to the end of my speech, but before I close, I would like to thank the
organizers of this important forum for inviting me and for the excellent arrangements.
Thank you for your attention.