Retail Payment Systems
In the OIC Member Countries
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Market access for foreign banks was somewhat limited because they were not allowed to open
more than eight branches throughout the modern banking operation period (1980-2003). In
2003, however, laws were changed, and today banks are allowed to open more than eight
branches special permission. Foreign banks confronted no obstacles, however, when they
wanted to open a representative office. At the end of 2004, there were thirty-six representative
offices throughout the emirates. Thus, UAE has been well represented by a cross-section of
foreign banks.
Federal Law 10, enacted in 1980, is the backbone of the conventional banking sector
(excluding Islamic banks), and Federal Law 6 was promulgated in 1985 to legalise Islamic
banking in the UAE. Islamic banking is still a small component of the UAE banking sector.
According to Islamic banking laws, banks cannot charge a fixed interest rate on deposits or
loans. Variable interest rates based on a profit/loss-sharing model is the foundation of Islamic
banking. Under the Federal Law 10, the Central Bank of the UAE was also established, and it
took over the responsibilities of the Currency Board. The bank's duties include advising the
government on monetary and financial issues, issuing currency, maintaining gold and foreign
currency reserves, and formulating a credit policy. All regulation and supervisory duties are
under the direction of the Central Bank. The UAE currency is pegged to the US dollar, which is
why the central bank has a limited role to play in setting monetary policy and controlling
interest rates; however, some monetary and credit controls are exercised through its sale and
purchase of certificates of deposits.
The central bank plays a role in formulating and monitoring credit policy, and in supervising
the financial sector as well (see Hashmi, 2007). All commercial banks incorporated in the UAE
are licensed by the central bank, and therefore are subject to the central bank’s requirements
and regulations. In 1998, the central bank made it mandatory for all banks to use International
Accounting Standards (IAS), and in early 1999, local banks were instructed to establish clear
corporate structures. Furthermore, the UAE central bank requires banks to maintain a capital
to risk-weighted assets ratio of at least 10% at all times. According to the Central Bank of UAE
regulations, all banks must be majority owned by UAE nationals. They also have to be
registered as ‘Shareholding Company’ under the UAE Companies Law and must be registered
with the Federal Ministry of Economy and Trade. (Central Bank of the UAE, 2005)
With regard to payment systems, the Central Bank established the Payment Systems Oversight
Unit (PSOU) in April, 2009 to supervise payment systems in general and to ensure their
efficiency and compliance with the Core Principles for Systemically Important Payment
Systems issued by the Bank for International Settlements (BIS). Every payment systems in the