The country's banking system needs as much as Dh25 billion (US$6.8bn) in extra cash to spur a resumption in lending to consumers and businesses, a top banker says. The warning yesterday from the chief executive of Noor Islamic Bank came as local lenders reported provisions continued to mount as a result of the collapse in property prices and the restructuring of billions of dollars of distressed debt.
National Bank of Abu Dhabi, one of the country's largest banks, yesterday became the latest lender to signal a difficult year ahead for banks. Between October and December, it made provisions amounting to Dh623 million as a hedge against more bad loans. "The banking sector in the UAE needs continued capital injection. I can say we need another Dh20bn to Dh25bn," said Hussain al Qemzi, the chief executive of Noor Islamic Bank, a Sharia-compliant lender that is partly owned by the Dubai Government.
The financial crisis has rapidly depleted capital in the banking system, making it more difficult and expensive for consumers and businesses to obtain loans. Although the Government has injected billions of dirhams of fresh capital into the banking system since late 2008, loans across the system exceeded deposits by Dh35.1bn at the end of last year. Ideally, in individual banks, loans should not exceed deposits.
Loan growth in the Emirates is expected to be just 5 per cent this year, or roughly the same as last year, said the Saudi bank Samba. In contrast, loan growth in 2008 was 38 per cent. While consumers and businesses find it harder to obtain new credit, many are also paying more for their existing borrowings as banks move away from the Emirates interbank offered rate (Eibor), which has in the past largely determined the cost of credit, ranging from car loans to mortgages. The Eibor has dropped from about 4.8 per cent in October 2008 to under 2 per cent this week.
But loan costs have remained stubbornly high as banks pull back from lending to each other and increase the cost of funds in the market. Last year, Noor Islamic said it had received a portion of the $10bn Dubai provided as the first half of its Financial Support Fund. Starting in late 2008, the UAE made available a total of Dh120bn to shore up its banks after the financial crisis, which saw billions of dollars in foreign capital exit the country.
Despite moves to bolster the country's banking system through government intervention, lenders have found it difficult to raise funds through bonds. The planned restructuring of some $22bn owed by the Dubai World conglomerate to local and international lenders has also made it more expensive for banks to issue bonds, as investors demand better premiums in return for what they perceive to be greater risk.
Mr al Qemzi said he still expected liquidity to improve this year, although not to previous peak levels. Sheikh Ahmed bin Saeed Al Maktoum, the bank's chairman, also expected an improvement in credit conditions. "This year banks will go back to customers to restart lending. [Compared with] what we have witnessed in 2009, things should not deteriorate," said Sheikh Ahmed, who is also the chairman of Emirates Airline.
Noor Islamic Bank was formed during the last big wave of bank creations at the peak of Dubai's economic boom in 2007. It became operational in early 2008 and mostly serves corporate clients. @Email:email@example.com