UAE Central Bank Action may Not Spur Lending Until 2010

ABU DHABI — The UAE central bank’s revamp of the banking panel that sets interbank rates and its other efforts to spur lending may not have any effect until next year, bankers  and analysts said.

By (Reuters)

Published: Fri 4 Sep 2009, 10:42 PM

Last updated: Sun 5 Apr 2015, 9:58 PM

The central bank last week restructured the rate-setting panel of banks in a bid to cut the cost of interbank lending as it eased rates on liquidity support facilities. The new panel, due to start work this month, adds four new local banks and drops two  international lenders.

The central bank also modified its capital adequacy formula for banks in a move intended to boost liquidity. But bankers say the central bank’s measures merely address short-term liquidity issues and are unlikely to have  an impact this year.

“The central bank’s measures are mainly in providing short-term facilities against securities which are anyway available among banks and at lower rates,” said the chief executive of an Abu Dhabi-based bank, speaking on condition of anonymity.

“We need the central bank to lend us long-term money at attractive rates. There is no long-term money in the market and of course there are risks,” he said declining to be named.

Most UAE banks have been hit by writedowns or rising bad-loan costs after lending aggressively to the property sector, especially in Dubai, during the real estate boom that defined the emirate’s skyline over the past five years.

Banks in the UAE and elsewhere in the Gulf have also revealed losses or potential losses to debt-ridden Saudi conglomerates Saad and Al Ghosaibi. “There are some market factors at play — lower demand from clients and a slowdown on the corporate side,” said Sanjay Uppal, Chief Financial Officer at Emirates NBD, the largest lender in the UAE by assets.

“The pace may probably increase in the first or second quarter next year. The reason is that we believe the global environment and the impact of its recovery trickling down this region.”

Bank credit in the United Arab Emirates fell 0.2 per cent in July from June although deposits rose slightly as banks continued to exercise caution in lending, central bank data showed last week. Loan growth dwindled from the double digits of recent years to just 1.3 per cent in July.

“We believe this continues to be reflective of strong risk aversion, continued funding stress and the loss of a sizeable loan rotation sector -real estate and construction,” said a research note from Al Mal Capital.

Banks are competing fiercely to attract deposits by offering high rates, increasing their costs. “Banks want the overall cost of funding to come down, not just interbank rates,” said Deepak Tolani, banking analyst at Al Mal Capital. “The central bank is taking steps in the right direction but needs to formalise announcements made relating to guarantee programmes for deposits, bond issuances etc,” he said.

Yet, the central bank insists there is enough liquidity in the financial system and warns it may be compelled to take further steps to trigger lending. “By the end of the year, if they don’t see direct improvement in those actions from banks, the central bank may go to banks to see what they are doing and review their loans,” said Mohammed Ali Yasin, CEO of Shuaa Securities. “Banks cannot continue putting money in the vault and saying they are afraid of the times,” Yasin added. —