The role of the UAE’s central and commercial banks in economic realm are crucial for attainment of best economic outcomes. The government through the central bank of UAE has a duty of developing a favorable environment for business activities. According to research by Sanjaya (2003), the government and its regulatory role is the basis of all business activities and tasks in the economy. Through the development programs, the Central bank provides sound infrastructure on which business transactions are undertaken. Similarly, the commercial banks, by complying with the central bank’s regulations contribute to economic development and prosperity of the nation as well as advancement credit facilities.
The central bank of UAE acts as the regulator of the monetary affairs in the country. In UAE, business is the major economic activity. Through monetary policy, the central bank maintains price stability in the nation economy, promotes the maintenance of effective financial system and to ensure that the currency needs of the public are met. The Reserve banks that have been established in most nations ensures that citizens transact their business activities using money. Commercial banks issue physical cash to the public, items they buy from the Reserve Bank. To avoid price instability and economic fluctuations, the reserve bank ensures that government currency retains its strong buying power. It also adjusts interest rates to meet the needs and demands of the investors in the economy.
The government’s monetary policy also helps protect the value of citizens’ incomes and savings by delivering price stability. More importantly, through the monetary policy, the government sets a favorable economic environment against which businesses and private households can make the best choices for sustainable growth. Despite the disparities in the form and the scope of these regulatory laws, all have the purpose of improving the operations in the market economy and promote harmonious business activities (Wade, 2009).
To ensure smooth of economic activities and economic stability, the Central Bank has to chip in.. Regulations by the central bank of UAE are seen as execution artifacts of stipulated policies. The regulations are designed in away to ensure that the commercial banks and other financial institutions comply with the set laws.
The central bank of UAE also contributes to Stability and Economic Growth.
The central bank of UAE regulates interest rates with the sole objective of maintaining economic stability. Interest rates stability is paramount for proper functioning of the overall country because it promotes long-term investments in a market-based economy.
The central bank of UAE control and regulates the overall pace of the economy through interest rate and money supply targeting as macro economic objectives. To encourage borrowing by the private sector, the central bank of UAE uses its monetary authority to lower the interest rates by increasing money supply. To reduce money supply, the central bank of UAE use raises its last lending resort interest rates so that the public cannot borrow more, but save. The central bank of UAE thus influences spending and controls the amount of money in the economy (monetary policies).
The commercial banks can have the capability of speeding or slowing the rate of economic growth hence affecting price level. When the country’s economy is sluggish, the government uses deflationary set of policies i.e. it reduces the amount of taxes on individuals hence leaving taxpayers with extra money to spend and increases spending on businesses and producers within the economy. The banks will then be willing to give more loans based on the high purchasing power of the borrowers. This would in turn lead to increased in consumption level. People will spend more money hence pumping cash into the economy. This is often referred to as expansionary effect by the central bank. Conversely, when the economy is booming, the central bank of UAE reduces its spending, through monetary policies. This causes the entire economy to contract. The government, through the monetary authority (central bank of UAE), uses monetary policy to control availability of money, supply of money, and cost of interest rates to attain pre-determined objectives of stabilizing the economy.
When the country is experiencing economic recession and high levels of unemployment, as the case during recession, central bank of UAE increased the total supply of money. The central bank of UAE lowered interest rates hence private investors will go for public borrowing. Conversely, when the economy is doing well, the central bank of UAE decreases the total supply of money by raising interest rates. This will combat any existing inflation. Monetary policy is the main tool used by the central bank of UAE in preserving the value of currency in the economy.
central bank of UAE uses several Tools, though the commercial banks in implementing monetary policy. First, there is the Open Market Operations: In order to attain the desired level of reserves, central bank buys or sells tradable securities in the secondary market. The bank can also buy securities in exchange for money stock thus injecting money into the economy. In the free market economy where law of supply and demand are effective i.e. determine interest rates, the money stock will automatically adjust to the required level thus affecting availability of money in the economy (Sanjaya 2003, 5).
Discount Window Operations: In UAE, the central bank of UAE, is the lender of the last resort. It provides secured short term funds to the commercial banks at retaliatory rates, and this paralyzes the capability of banks to seek funds in the free market economy. Depending on its monetary policy objectives, the central bank sets the discount rate. This will affect the ability of the commercial banks to lend thus influencing money supply.
Reserve Requirements: UAE has established law which empowers the central bank of UAE to retain pre-determined commercial banks deposits which are held as reserves. This limits the ability of commercial banks to extend credit.
Also, the Central Bank is legally mandated to act the government’s financial agent, issue currency and regulate overall bank system (ADCCI, 2010).
The commercial banks also promote and create employment opportunities in the economy of UAE. Through the employment, the economy has been able to register robust growth and stability. At the same time, the standard of living of the employees has improved due to the income that the employees derive from the banks.
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UAE Central Bank (2010). About Us. Retrieved May 2, 2010, from
Wade, R. (2009) Governing the Market: Economic Theory and the Role of Government
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