UAE cbank chief says de-risking could hurt Gulf lenders

De-risking practices by international financial institutions can carry negative implications for lenders in the United Arab Emirates and GCC, mainly hurting correspondent banking relationships and funding for small and medium enterprises (SMEs), said UAE central bank governor Mubarak Rashid Khamis Al Mansouri.

De-risking – a process wherein financial institutions close accounts perceived to be at high-risk for money laundering or terrorist financing – has been increasingly used by US and European banks against the accounts of foreign lenders, including those in the Gulf, Mansouri said at a conference in Abu Dhabi.

“We see de-risking having two significant impacts on banks in the region, namely correspondent banking, and banks' relationships with exchange houses and SMEs,” he said.

Correspondent banking is a key part of the global financial system, wherein one financial institution provides services for another, particularly to facilitate cross-border transactions.

De-risking measures by U.S. banks could leave lenders in the region without a U.S. correspondent banking relationship, which in turn would force them to clear dollars through central banks, the governor added.

“This situation will result in a high level of operational risk as it would add one more party in the payment process. Furthermore, it places an unreasonable burden on central banks in terms of systems, compliance and reporting.”

While de-risking is theoretically intended to clamp down on money laundering and terrorist financing in the financial sector, in reality, the practice could have the opposite effect, Mansouri explained.

“With the closure of accounts at many major financial institutions, customers could resort to the informal sector that may not have adequate capacity to deal with the higher risk customers,” he said, adding that this could also have a wide range of economic and security implications.

“The result could hamper our efforts to foster financial inclusion and ensure adequate funding for the SME sector that we have aimed to grow towards further diversification of our economy,” Mansouri said.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com