Credit rise not a reason for UAE inflation

"We have been studying the monetary aggregates that are used in bigger economies but we haven't seen any relationship between inflation and monetary expansion. There is very little correlation in the UAE," he said adding: "These theories are made for economies in the West, not for the UAE economy."

Speaking at the monthly bankers' lunch held at the DIFC, Al Suwaidi said that total deposits held by banks are expected to grew by around 21.5 per cent this year, from Dh120 billion to Dh675 billion. This compares with total deposits of Dh555 billion in 2006.

Total loans and advances are also expected to grow by around 21 per cent, from Dh520 billion in 2006 to Dh630 billion by year-end, with some types of loans, such as mortgages, growing at a faster rate. Total assets and liabilities are also forecast to grow by around 23 per cent, from Dh852 billion in 2006 to Dh1,055 billion.

As a consequence of the banking sector's strong growth, total profits for the sector are predicted to grow by 25 per cent in 2007, from Dh19.4 billion in 2006 to Dh24.8 billion, said Al Suwaidi. He also added that the future for banks operating in the UAE was bright, "as the UAE economy is expected to grow further and will continue to grow in the foreseeable future."

He said that the implementation of the federal government strategy, which comes into effect on 1 January, "will create a lot of new opportunities for banks operating in the UAE." Banks, however, "need to be ready and prepared to participate in the strategy's programmes," he added.

Two programmes in particular should see banks continue to boost business. The first is the UAE housing loans scheme, for which the Central Bank is proposing that a specific law be promulgated. Under the proposed law banks would be able to use the homes of nationals as security for loans. This law would give banks the "right to take a mortgage, liquidate at default or even to collect interest payments from the government," said Al Suwaidi.

A loans scheme to small and medium enterprises (SMEs) would "enable banks to extend facilities across the UAE against some sort of security or payment of interest, or part of it, by the government," he explained.

Al Suwaidi also acknowledged the need to create additional financial instruments to ensure financial stability. "Securitisation must be dealt with in this context," he said. How best to facilitate the use of financial leasing is also being considered, he added.