Central Bank of Gulf Cooperation Council - Improvement of Financial Condition - Case Study Example

Finance and Accounting individual assignment Introduction The Cooperation Council for the Arab s of the Gulf is also known as Gulf Cooperation Council (GCC). During 1980, the Union Law issued the ‘Monetary System and Organization of Banking’ which provides the authority of banking and monetary system to the Central Bank. It also gives the power of controlling and implementing monetary, banking and credit policy of UAE to the central bank. The central bank guidelines consist- 1. Currency issuing as per the law. 2. It states that the currency should be stable and it can be freely converted into foreign currencies. 3. It needs to adopt a credit policy which will help to achieve the target growth of the economy. 4. It should develop the efficiency of banking system in nation. 5. It will act as a banker to the govt. The lending capacity of the central bank has increased from AED 155.2 billion at the end of 2000 to AED 972.1 billion at the end of 2010 and foreign assets of banks operating in UAE has increased from AED 91.5 Billion at the end of 2000 to AED 233.5 billion at the end of 2010. Thus we can see that the bank has a quite good financial position in the market (Central Bank Of The U.A.E, 2013). Structure of the Suggested Central Bank for GCC Board of directors of the Central bank have reorganized the structure of the bank which is now having five branches with seven departments and seven divisions , seven units and a risk bureau. It has five branches in major cities in the nation and the head office is in Abu Dhabi. These branches have three main sections as Accounts, Banking operations and administrative affairs. The central bank has seven departments which include Banking operations, Banking supervision and Examination, Financial control, treasury, Research and statistics, Administrative affairs, internal audit. Seven divisions further add IT, Correspondent Banking, Public Relations, general Secretariat, Personnel, Legal affairs. The central bank has another vertical of seven units which includes IT projects unit, Strategy Unit, Banking and Monetary statistics unit, Financial Stability unit, Benchmarking Unit, Anti-Money Laundering cases unit, legislative development unit with a risk bureau (Central Bank Of The U.A.E, 2013). Banking supervision and Examination department deals with other financial institutions which includes local banks, branches of foreign banks and finance companies. The department has a responsibility to set up standards for the sector and to monitor it. Banking operations department supervises the printing and launching of new notes. It also regulates the funds transfer system of UAE. Administration affairs department consists of various sections like purchasing section and maintenance section etc and it monitors the operations of these sections. Research and statistics department is considered as the main source of banking and monetary statistics. It is also entitled to communicate with international institutions like IMF and AMF. Financial control Department’s tasks are to regulate, control and communicate about the various financial aspect of the central bank. Treasury Department manages the day to day reserves of the central bank. Its investment strategy focuses mainly on the liquidity of the bank and it preservation of capital. Internal audit department is mainly attached with two different tasks- 1. Perform pre audit, audit and post audit procedures. 2. At the end of each month it has to prepare a report of its auditing activities and to submit it to the governor (Hassan, 2010). Similarity and Differences between European Central Bank and Central Bank of GCC There are certain similarities and diffrences between European Central Bank and Central Bank of GCC. Course of action of European central bank has been the most popular role model globally for regional integration. Thus GCC was expecting to get benefit from the experience of euro zone. As the central of Europe has also suffered due to the euro zone crisis, GCC want to make use of the experience earned by European central bank. The similarity between European central bank and GCC central bank is that both have established single currency for the nation. Thus when sovereign debt crisis rose in EU and had an effect on euro currency then it was assumed that it might affect the single currency of Gulf. Gulf leaders have stated that the euro’s situation might postpone the single gulf currency. The similarity between them is idea of currency integration. But the difference will appear in case of challenges that will be faced by GCC as compared to euro currency crisis. Standardization organization of GCC has inspired by EU central bank to determine five necessary fields to achieve similarity between terms and policies of different states. These fields include interest rate, inflation rate, amount of reserves for foreign exchange, public debt and budgetary deficit. Budgetary deficit and huge public debt are considered as the important factors in euro countries as their govt. kept on borrowing money from public to fund the expenses. Unlike the euro countries, govt. of GCC countries need not borrow money from public as they are quite rich in gas and natural oil resources. Thus they don’t have any certain limits for borrowing from central bank and the main determinant of the money supply in GCC is their fiscal policy. Arguments For and Against the GCC Central Bank It was seen that during global financial crisis in 2008, GCC central bank made some difference in monetary policy which had helped it to keep it rate untouched. Before 2008, when inflation rate between USA and GCC countries were equal then it was natural for GCC central bank to follow Fed’s path. But in 2008, it was seen that GCC central bank had taken different steps in their monetary policy for two most important reasons- 1. Due to the liquidity crisis in emerging and mature market, inflow of capital was restricted in GCC area. Thus although the interest rates were higher in GCC but the central bank had chosen different way in the monetary policy to face the liquidity crunch. 2. Because of the high inflation rate and negative interest rates were present in some countries in GCC thus it discouraged the inflow of capital. Inflation rate is very high in some GCC countries as per capita income of people is also high but higher inflation rate doesnot always suits the common people of the country. Along with this, negative interest rates also have acted on the inflow of capital in the GCC countries. Due to the above developments, GCC central bank was able to head for own monetary policy without changing the fixed exchange rate system. Unlike the banks in USA, mostly all banks of GCC were well capitalized. Thus for the central bank of GCC, main problem was not to fix the liquidity but to fix the inflation rate (Setser, 2007). Objectives and functions of GCC central bank Central bank started its function in 1980 with the objective of regulating credit, monetary and banking policy and to supervise over the implementation of these policies in gulf countries. It was established to stabilize the currency and economy of the nation. To achieve these objectives, the central bank has some functions to do which are as follows- 1. It has to make an effort to support the stability of the currency to ensure the free conversion of it in foreign currencies. Central Bank of GCC has teh responsibility to maintain the stability of the currency in GCC countries to avoid high fluctuations against foreign currency. 2. The central bank should implement a credit policy which will improve the economical growth of the nation. Thus it needs to consider socio-economic situations of the nation to improve the credit policy to the people which will lead to significant economic growth of GCC countries. 3. It has to organize the effectiveness of the banking system. Banking system should be improvised as banking system is necessery to strengthen the economic background of a country. Banking system regulates the circulation of money within the nation thus effectiveness of banking system is necessery for a nation. 4. It needs to advise the govt. on changes in monetary and financial issues.Govt should change teh monetary and fiscal policies of the nation to ensure better capital inflow in the country. 5. It maintains the reserves in form of gold and foreign currencies to meet the needs of govt. 6. It acts as banker to the govt. and bankers to other banks in the nation. 7. It plays an important role as a financial agent at IMF and at IBRD and to other financial institutions like AMF. 8. It also deals the financial concern of different state in the nation. Conclusion From the above study it can be concluded that Central bank of GCC has improved the financial condition and stabilized the currency in the economy. It has given a single currency to gulf countries and it monitors and controls the operations of other banks in GCC with help of its various departments, divisions and units. Thus it plays an important role in GCC by strengthening its economy in today’s current market. References Central Bank Of The U.A.E. (2013). Central Bank of the United Arab Emirates. Retrieved from http://www.centralbank.ae/en/index.php?option=com_content&view=article&id=148&Itemid=106. Hassan, A. et al. (2010). The GCC Banking Sector: Topography and Analysis. Retrieved from http://www.imf.org/external/pubs/ft/wp/2010/wp1087.pdf. Maratheftis, M. (2009). Middle East. Retrieved from https://research.standardchartered.com/configuration/ROW%20Documents/GCC%20%E2%80%93%20positive%20developments_18_05_09_03_04.pdf. Setser, B. (2007). Understanding the New Financial Superpower –The Management of GCC Official Foreign Assets. Retrieved from https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&ved=0CDgQFjAD&url=http%3A%2F%2Fwww.cfr.org%2Fcontent%2Fpublications%2Fattachments%2FSetserZiembaGCCfinal.pdf&ei=eg6rUpXjCYePrQeO2YGACw&usg=AFQjCNFcqZ4-yCR8W5XPyO_ZAHG5USGMYQ&bvm=bv.57967247,d.bmk. Saidi, N. et al. (2010). The Case for Gold as a Reserve Asset in the GCC. Retrieved from http://www.difc.ae/sites/default/files/attached/8712/9180/5687/DIFC_Economic%20Note11.pdf. Aikholifey, A. No Date. GCC monetary union. Retrieved from http://www.bis.org/ifc/publ/ifcb32b.pdf. Read More