May 23 (Bloomberg) -- The selection of Riyadh to host a unified Gulf central bank for five oil-rich Arab states was politically motivated, United Arab Emirates central bank Governor Sultan bin Nasser al-Suwaidi said.

“The decision ignored the competitive advantages enjoyed by the U.A.E. and its banking sector, including having the largest number of banks, largest assets and largest deposits in the region,” state-run WAM quoted al-Suwaidi as saying.

The U.A.E., which has the world’s fifth-largest oil reserves and is the second-biggest Arab economy after Saudi Arabia, said May 20 it would no longer take part in the project to create a European Union-style monetary union. Two weeks earlier, Gulf leaders chose the Saudi capital of Riyadh as the site for the central bank.

“The location was not the only reason for the U.A.E. pulling out of the Gulf Cooperation Council monetary union,” al-Suwaidi was cited as saying. “There were also other reservations voiced by the U.A.E. which were not considered.”

The U.A.E. was concerned about the currency unit and the lack of a mechanism to guarantee a smooth transition, he said. The governor also said the emirates had reservations about the role of the monetary council, which was limited to research.

“It was supposed to play a key role in monetary policy,” WAM cited al-Suwaidi as saying.

Oman pulled out of the single-currency project in 2007. In the same year, Kuwait, the fifth-largest oil producer in the Organization of Petroleum Exporting Countries, dropped its currency peg to the dollar, which other GCC countries maintain.

The GCC is an economic and political bloc consisting of Saudi Arabia, the U.A.E., Kuwait, Qatar, Bahrain and Oman.

To contact the reporter on this story: Camilla Hall in Dubai at chall24@bloomberg.net

Last Updated: May 23, 2009 06:27 EDT