In the past, the main causes of bank insolvencies in many countries have been defaults on big individual loans and inadequate credit dispersion. This was attributable to an over-concentration of exposures to a single borrower or to a group of related borrowers which resulted in an unacceptably high risk of loss. For this reason, the Central Bank of the UAE (Central Bank), in its attempt to ensure the sound functioning of the banking system within the UAE, set rules aimed at preventing banks from incurring credit losses which might arise if an excessive concentration of exposures to a single borrower or to a group of related borrowers was not addressed.

The capital of a bank not only fulfills a liability function for its depositors but also plays an important role as a factor for limiting business risk and as a buffer against losses. The most appropriate way, therefore, to reduce credit risk is to limit a bank’s large exposures relative to the size of its capital base.

In addition to setting limits for large exposures, the Central Bank considers that it is also important to give guidelines concerning lending policies and procedures in general for all banks operating in the UAE. Moreover, the Central Bank has decided to monitor very closely the loan portfolio of each bank especially with regard to large exposures.

The guidelines given in the following pages have been prepared in order to explain the new rules to banks in detail and also to draw their attention to the specific risk arising from excessive exposures: they form an integral part of Circular No 32/2013.These guidelines must be supplemented with the relevant Basel Committee standards.