The UAE Central Bank has amended the capital adequacy ratio (CAR) norms and mandated all banks in the UAE to achieve a Tier 1 CAR of not less than seven per cent within an overall ratio of 11 per cent by September 30, 2009.

The circular received by lenders yesterday supercedes the earlier notification on CAR issued by the Ministry of Finance that mandated a Tier 1 ratio of 11 per cent by June 30. The easing of Tier 1 ratio by four percentage points will help banks unlock massive liquidity, said analysts and bankers.

The Central Bank circular also required banks to increase overall CAR to 12 per cent by June 30, 2010, with the Tier 1 component not less than eight per cent. "These percentages shall be applied on a temporary basis, and will be re-examined at the beginning of 2011, to determine whether or not to be continued," said the circular.

This, coupled with the decrease in the interest rate on the Central Bank's liquidity support facility announced yesterday, will enable UAE lenders to access funding more cheaply, while also freeing up large amounts from their capital base. In October, the Ministry of Finance asked all national banks to achieve 11 per cent Tier 1 CAR as a condition for receiving funding from the ministry's Dh70bn fund in proportion to their asset base.

"The ministry's number was too high compared with the earlier requirement that banks needed to maintain an overall CAR of 10 per cent whereby the Tier 2 component should not be more than two-thirds of Tier 1. Many banks had wondered how the ministry's Tier 1 ratio of 11 per cent could be achieved within the time-frame prescribed," said the financial controller of a Sharjah-headquartered bank.

The Central Bank's circular has brought all banks, including foreign banks operating in the UAE, under the purview of the CAR regulation.

The circular dated August 30 said the decrease in CAR, "based on the co-ordination between the Central Bank and the Ministry of Finance", was necessitated by "the existing global crisis, which continues to adversely impact various sectors".

Rate cut

The UAE Central Bank cut the interest rate on a liquidity support facility for banks by one percentage point to 1.5 per cent to boost economic growth and spur lending.

The facility was introduced last year and allows banks to deposit securities with the Central Bank in exchange for liquidity. The new interest rate will take effect today, the Central Bank said in a statement.

"This measure would basically reduce the cost of economic activities in the UAE, particularly investment spending, and would contribute to sustained growth and support the national economy in general," it said in a statement.

"The maximum duration of this facility is three months, but is renewable," Mohamed Al Tamimi, Assistant Executive Director of the Central Bank's Treasury Department, told Reuters. The Central Bank said it would lend against discounted "first class securities". Asked what constituted a first class security, Tamimi said he did not want to be specific. "They have to be acceptable to the Central Bank. The banks know the conditions."

UAE banks are liquid and hold around Dh60 billion in certificates of deposit with the Central Bank, said Tamimi.