The UAE’s banking sector is composed of 24 national banks with 657 subsidiaries, and 28 foreign banks with 82 subsidiaries.
According to the reports of UAE Central Bank, by the end of October 2009, the total assets of national banks reached 1.536 Trillion UAE dirhams (418.3 billion US dollars) with a growth rate of 8% when compared with the same period of 2008.
The challenge the UAE banking sector currently faces begun in mid-2008, when 150-180 billion UAE dirhams in foreign capital suddenly left the country. The Central Bank did not reveal at the time the factors that contributed to this capital flight. What is certain, however, is that this liquidity left the country over a relatively short period of time and that it had previously entered the country supposedly to benefit from the upward trend of the stock market, and the possibility of De-pegging of the dirham from the US dollar.
Regardless of the motives behind this trend, it has undoubtedly created a wide liquidity gap, which only got worse after two big financial companies (AMLAK and TAMWEEL) suspended circulations of their stocks in Dubai Financial Market. This gap has affected the borrowing process and led to a decline in its volume.
The graph shows clearly a neat decrease of this ratio in October 2009 to 103.8%, which means a reduction in the liquidity to 37.6 billion dirham (10.2 billion dollars). This decrease in percentage was better than the moving average of two previous periods (which is shown in the graph in red).
There is ample evidence to support the view that the most important government decision leading to the stabilization of the market was the state’s full guaranty of deposits in local and foreign banks operating in the country. In addition, the government injection of 120 billion dirham (32.7 billion dollars) through the Finance Ministry and the Central Bank also contributed to the stabilzation.
However successful the stabilization of the banking sector was, lending operations remained limited, with a growing number of defaults on debt. Allocations for bad debts rose from $6.3 billion in October 2008 to 10.4 billion dollars in October 2009. This came about as some of these allocations were part of debts granted by United Arab Emirates banks to the two defaulting groups of Saad Gosaibi, and to the many defaults by the expats who lost their jobs and had to return home. Moreover, the truth is that banks were already over tolerant in granting credit before mid-2008. The average of UAE banks' capital adequacy (which expresses the durability of the UAE banking sector according to international standards) at the end of the third quarter of 2009 reached 18%.
Furthermore, Dubai World announced at the beginning of December the rescheduling of outstanding $ 4.1 billion in debts of one of its subsidiaries (Nakheel). The company has later proposed rescheduling this payment to May 2010 as well as discussing the rescheduling of the company's $ 26 billion due on different dates.
This rescheduling and payments may constitute a considerable pressure, especially if these obligations (bonds) are concentrated in large banks such as the Emirates National Bank of Dubai (ENBD) and the Abu Dhabi Commercial Bank (ADCB). These two banks were part of the creditors' committee in charge of negotiations on the terms of postponement and rescheduling.
The request to reschedule the payment of the debt has been accompanied by a lot of fuss by the international and Western media. It has been given peculiar descriptions such as the "failure to repay" or the "Bankruptcy of Dubai". In order to avoid the consequences entailed by such exaggerated headlines, Dubai surprised everyone by repaying the due amount in collaboration with the Government of Abu Dhabi. The support of Abu Dhabi came in the form of bonds worth US$ 10 billion. Other creditors are expected to be paid their dues. This measure will contribute to alleviating the pressure on bank liquidity.
Repaying the debt in due time was a strong message conveying the commitment of the Government of Dubai to maintaining a healthy investment climate in the emirate. The cooperation of the Government of Abu Dhabi conveyed a second message: in the context of the Federal State, the UAE economy is capable of facing crises, while keeping its developmental plans in the state budget. This fact was confirmed by the declarations made by officials from the International Monetary Fund.
One should expect that the power of the UAE banking sector will be tested again in the first quarter of 2010. Payments due during this period are expected to be postponed. At the same time, the banking sector will have to not only meet the needs of the finance and credit sector, but also try to reduce the ratio of loans to deposit below 100%. This will certainly require an increase of deposits. All these factors need to be balanced by the banks under the watchful eyes of the Central Bank.
Dr Wadah Al-Taha – Senior Economist and Financial Analyst
