UAE banking sector strong, says IMF

With regional and global trade deals in the works the country's banking sector has rapidly expanded and authorities are starting to realise the importance of creating a more 'favourable' environment by easing the licensing process of establishing banks.

'The banking sector as a whole shows comfortable levels of capitalisation and profits, having benefited from the rapid expansion of the economy,' said the report.

Nonetheless the IMF team recommends that this liberalisation is further extended to non-GCC foreign banks, as currently they are exposed to a 20 per cent tax on profits that is not applied to domestic banks.

Giyas Gokkent, researcher at the National Bank of Abu Dhabi, told AME Info that although the report's findings were not 'revolutionary', he believes that improved regulations set by the Central Bank of the UAE (CBU) are shielding the dirham from foreign currency exchange rates. 'The UAE's fixed exchange rate does have a direct impact on increasing the level of inflation and credit growth,' he said.

According to the CBU, total domestic credit levels have increased by 32.2 per cent year-on-year while the total bank assets are up by 40 per cent. 'Currently banks are tapping into external sources of funding in order to fulfil increasing demand on loans to the private sector,' said Gokkent. He said the drop in deposits was not enough to be of concern. 'In the short term the deposits might be a lower level compared to loans, but in time I think that both will move in parallel,' he added.

On the other hand the rapid price increase in the real estate market has sucked a few banks dry leaving their capital 'seriously depleted'. Although the mortgage sector is still at its infancy only accounting to 6.6 per cent of bank loans most lenders operate with loan-to-value ratios (LTVs) of 70 to 80 per cent.

'…A turnaround in the real estate sector could affect the quality of consumer and other loans. Moreover, some financial institutions lending standards also may be weakening as they compete for new business in mortgage lending. Therefore, [IMF] staff recommends that the CBU issue prudential regulations to limit the risks associated with mortgages and other real estate lending by banks and finance companies,' the report said.

The report also pointed to the market trend of having more Islamic banks, mainly fuelled by the public's demand for more Shariah-compliant financial institutions. Since 2002, Islamic banks have increased their share of total bank assets from 12.6 per cent to 14.2 per cent by the end of 2006.

'But the main problem is that these banks do not benefit from the availability of hedging instruments, money market instruments and funding facilities at longer maturities,' said Gokkent. 'And there is also a lot of duplication in the operation of the banks, for example when you go inside there's a separate section for men and one for women, which requires the bank to employee twice the number of tellers,' he added.

Despite these challenges Gokkent still sees Dubai as one of the natural homes for the sector and forecasts a period of strong growth ahead.

See also:
UAE set for 60 per cent growth by 2012 says IMF
Ryada Capital launches Islamic hedge fund
Working With Islamic Finance