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According to Global Investment House's report on "the Banking Industry in UAE," the growth was driven by a 21 per cent surge in the credit volume to Dh238.2 billion.
"The sector had an excellent year in 2003, and the good performance continued in 2004 too. Good times prevailed predominantly owing to high credit and deposit growths on the back of a favorable interest rate environment, high oil prices and a flourishing economy." the report said.
Apart from the growth in assets and the resultant increase in net interest income, the UAE banking sector was also helped by the steady presence of non-interest revenues, thereby lending stability to its earnings in times of interest rate fluctuations. Higher trade finance, a characteristic of UAE's banking sector, and fees arising out of rising consumer banking activities have pushed up revenues in the form of fees and commissions, the report noted.
The report noted that banks in UAE primarily belonged to two categories — local and foreign — with the latter being restricted from operating more than five branches. Some of UAE's top banks are majority-owned by Governments of Abu Dhabi or Dubai.
Another notable feature of the UAE banking sector, according to the report, is the rapid strides made by Islamic banking sector in the country during the last couple of years. "A range of sharia-compliant products were introduced in the market and Islamic finance deals like Ijara transactions have become common in mortgage deals. Dubai Islamic Bank (DIB), the leading Islamic bank in the country, has been mandated as the lead manager and arranger of deals worth US$1.1bn, including the $750 million Islamic sukuk for Dubai's Civil Aviation Department to finance the phase-2 expansion of Dubai airport."
"Though the local banking industry has been protected from foreign competition since 1982, foreign banks continue to operate successfully in the country. Most of these banks started operations during the oil price-driven economic boom in 1970s and are headquartered in Dubai. In terms of openness to foreign banks, UAE is behind Bahrain, but ahead of Saudi Arabia and Kuwait. Foreign banks accounted for 24 per cent of the total assets in the banking system at the end of September 2004," it said.
Led by robust growth in deposits and credit, the overall size of the balance sheet increased by 12.8 per cent to Dh413.7 billion in the first nine months of 2004. In terms of asset size, UAE's banking sector is second only to Saudi Arabia within the AGCC. Asset size of all the national banks put together increased by 12.8 per cent to Dh314.3 billion, while that of the foreign banks increased by 12.7 per cent to Dh99.5 billion The credit growth has been higher for the national banks.
The report pointed out that asset composition of UAE banking sector is characterised by a high proportion of claims to the private sector and an exceptionally high proportion of foreign assets. Foreign assets, which formed 27.5 per cent of the total assets at the end of 3Q04, pertain to the investments made abroad by the government and funded by the banks in UAE. Most of this exposure is in the form of bank placements, and a significant portion of it is to top-rated banks in Western OECD countries. However, it can be seen that the proportion of foreign assets has come down during the last two years, losing its share to credit facilities, which formed 57.6 per cent of assets at the end of 3Q04, which is on a slightly higher side compared to other AGCC countries.
According to the report, credit facilities have led the asset growth of the UAE banking sector.
"After a sedate growth in 2001, growth of total credit accelerated in the following two years. Cashing in on the favourable macro-scenario, total credit increased by 18.4 per cent to Dh226 billion in 2003, with the credit to residents growing by 18.9 per cent to Dh196.9 billion.
"The total credit and credit to residents grew further by 21.1 per cent and 21.0 per cent in the first three quarters of 2004. Industry and commerce accounted for the major chunk of the loans and advances at 53.5 per cent, while credit to the government, which has been increasing, constituted 11.8 per cent of the total credit.''
''About 22 per cent of the loans and advances fell in the category of others, which included individual loans."
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