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Gap Between Loans and Deposits Narrows to Dh46 Billion
DUBAI — The funding gap between total loans and deposits at UAE banks narrowed to Dh45.9 billion in July, down 3.0 per cent from the previous month, as bankers lost much of their appetite for lending during the recession
Total loans and advances by UAE banks declined by 0.2 per cent in July to Dh1.01 trillion compared with corresponding figures for June. Bank deposits rose by 0.2 per cent to Dh964.1 billion over the same period, the Central Bank data showed.
“The (July) numbers show that credit is still not growing. The credit crunch in the UAE is domestic. Outstanding loans are still higher than deposits, and this funding gap is one of the main reasons that makes it harder for banks to resume lending,” said Marios Maratheftis, Chief Economist at Standard Chartered Bank.
The difference between loans and deposits in July was Dh1.4 billion smaller than the June gap of Dh47.3 billion. The modest reduction of this gap in July marked a reversal from the prior month, when banks converted many of their government deposits into Tier-2 capital while also making more loans. The loan-to-deposit overhang in June was Dh16.1 billion bigger than it was in May.
UAE banks are officially barred from lending more money than they hold in deposits, though this rule has not been rigidly enforced.
The current funding gap originated when UAE banks used so-called hot money from overseas to finance excessive lending at the peak of last year’s economic boom. Loan growth reached close to 50 per cent last year over 2007. When the hot money flows reversed, banks faced a funding gap.
Banks are now competing to offer depositors higher interest rates in an effort to raise new funds, but this squeezes their already strained profits and can lead to stiffer lending rates.
“The economy is therefore hit by a double whammy: An end to credit growth and at the same time higher interest rates...,” Maratheftis said. “Monetary conditions are tight at a time when they need to be loosened up to aid the recovery.”
Meanwhile, the country’s M1 money supply shrank by 13.5 per cent, faster than the 10.7 per cent decline in June, the Central Bank said in a statement on its Web site.
The contraction in M1 “may be reflective of lower consumption expenditures,” said Giyas Gokkent, Chief Economist at the National Bank of Abu Dhabi. He added that the slowdown in lending activity by banks has resulted in slower deposit growth.
The M2 money supply, which includes deposits in foreign currencies and long-term savings accounts, grew by an accelerated 6.4 per cent in July compared with 6.2 per cent in June. The UAE’s M3 money supply, which also comprises government deposits, rose by 14.3 per cent in July, compared with 13.5 per cent in the previous month, the Central Bank data revealed.
· With inputs from Agencies
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