The UAE only issued its first currency in 1973 but is now known as a global financial hub. Rebecca Bundhun reports
Forty years ago, the UAE did not even have its own currency. Today, it is home to the leading financial centre in the Middle East.
The development of the financial services industry has gone hand in hand with the evolution of Dubai as a trading hub for the region.
But it is easy to forget that it was only on May 19, 1973 that the first steps were made towards setting up a monetary authority, with the creation of the UAE Currency Board.
Launched a year and a half after the formation of the UAE, the board's first task was to issue a national currency to replace the currencies in use at the time, which were the Bahraini dinar and the Qatari and Dubai riyal. The UAE dirham went into circulation that same day and the other currencies were phased out within weeks.
Lebanon was the Middle East's financial hub then, a title it held until the outbreak of civil war in 1975, when many banks relocated to Bahrain.
Some international banks had already moved in during the Trucial States period.
Standard Chartered set up its operations in 1958, with its first branch opening in Sharjah. HSBC acquired The British Bank of the Middle East, which had branches in Abu Dhabi, in 1959 and used the name until 1999.
A number of local banks were also operating. National Bank of Dubai launched in 1963 as the oldest local bank in the southern Gulf, while National Bank of Abu Dhabi has been around since 1968.
Banking transactions for companies in the UAE 40 years ago were a far simpler affair.
"The kind of products companies used in the 1970s were fairly straightforward and a reflection of their size and focus at the time," says Georges Elhedery, HSBC's head of global markets Mena. "For instance, they might look to banks for standard loans on a one-to-one basis for mainly regional use. Now, many regional companies look to banks to launch international bonds, bringing in investors from around the world. And, it's not just about raising money. The use of more complex derivative-based products has grown massively."
But as the country's economy developed, it became clear that the country needed a fully fledged Central Bank.
"The board was found to lack the authority to regulate the increasingly complicated and diverse monetary scene, particularly after the quadrupling of the oil price in 1974 had caused a big increase in the number of foreign and local banks and in the scope of financial transactions," says Frauke Heard-Bey in her book, From Trucial States to United Arab Emirates.
On December 10, 1980, the Currency Board became the Central Bank of the UAE.
"Such change was extremely necessary, in view of the huge economic development, which coincided with the establishment of national banks - 21 banks then - and with the currency in circulation reaching UAE Dh2.1 billion as at December 31, 1980," the Central Bank says.
The entity became more powerful, with the Central Bank becoming responsible for the organisation of the country's monetary, credit and banking policy and maintaining currency reserves in gold and other currencies.
It was a challenging process.
"It was no easy task to regulate and rein in the diverse financial and banking practices to which the liberal economies of the individual emirates had become accustomed," says Ms Heard-Bey. Rapid growth of the country's economy followed, with cash in circulation increasing more than ten-fold from Dh2.1 billion in December, 1980 to Dh23.2bn in June, 2007, while Central Bank assets in foreign currencies and gold increased from Dh7.28bn to Dh159.31bn, data from the Central Bank show.
Dubai launched the Dubai Financial Market in 2000. The cornerstone of Dubai's ambitions as a financial services hub was the launch of the Dubai International Financial Centre (DIFC) and the Dubai Financial Services Authority in 2004. The financial free zone now has a client base of more than 800 registered firms, including 18 of the top 25 global banks.
* With additional reporting by Gregor Stuart