UAE central bank removes 20% cap on real estate loans, Banking Federation chief says

Commercial banks are expected to see a five per cent loan growth next year, Mr Al Ghurair says

“The announced fiscal stimulus packages will help lift economic growth, increase consumption, revive the property market, and improve labour markets as the investors and consumers’ sentiment continues to solidify,” the central bank said. Sammy Dallal / The National
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The Central Bank of the UAE lifted a 20 per cent cap on real estate lending as a percentage of the total deposits of banks, the chairman of the UAE Banks Federation said.

The restriction was removed through a law issued in October, however, a new ceiling on lending was not put in place, Abdul Aziz Al Ghurair said on Sunday in Dubai. The banking body is working with the regulator to "define what is real estate" and whether loans for assets such as hospitals, schools, malls and mortgage lending, where the source of repayment is the salary of the borrower, can be classified as real estate loans, he added.

“With the new law there is no restriction … it has been lifted,” said Mr Al Ghurair. “The 20 per cent cap [on loan exposure to banks] was prescribed in the law No 10 and that has now been abolished.”

A spokesman of the Central Bank could not be reached immediately, and the regulator did not reply to questions seeking clarity on the issue.

A law was issued by the President Sheikh Khalifa on October 28 replacing legislation from 1980, raising the capital of the Central Bank to Dh20 billion. It also called for the establishment of a general reserve of up to four times the paid-up capital of the regulator. The decree also sets three major objectives for the regulator: protecting the stability of the financial system; ensuring prudent management of foreign reserves and maintaining stability of the national currency to achieve balanced growth of the national economy.

A Central Bank statement on the new regulation, however, did not specifically address the issue of the removal of the real estate loan restrictions.

The fixed 20 per cent cap, Mr Al Ghurair said, has now been replaced with a more flexible policy whereby the central bank may choose to impose the restrictions on the banking sectors’ loans to the real restate sector, depending on its views on the health of the reality sector in the economy.


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“In the past it was prescribed in the law so central bank had no choice but to apply. Today the Central Bank may say 20 per cent or 10 per cent or 30 per cent overnight,” he said. “The flexibility is with the central bank, which is the right thing to do as these are tools you use depending on the cycle of the economy.”

There’s no timeline as to when the regulator will define which loans will be classified as real estate sector loans in the UAE, he noted.

“It’s a work in progress," Mr Al Ghurair said. "We [Banking Federation] have given what we think [is right] and we are waiting from the central bank to decide what will go into that [real estate sector loans],” he said. “That’s a $100m question”.

Separately, bank loans are projected to grow 5 per cent next year, Mr Al Ghurair said.

Most of the banks in the UAE have gone through the worst cycle of lending growth and write-offs for bad loans, he said, adding: "Now what we have is the business as usual [and] provisions, depending on what business you are in.”

The head of the banking group advocated for maintaining keeping the current loan-to-value levels for mortgages.

Banks are lending for a very long period of time so the customer should have something “at stake” to reduce risk for the lenders, Mr Al Ghurair said.

Any rise in interest rates is positive to neutral for UAE lenders, he added when asked about the potential impact of additional rate hikes by the US Federal Reserve next year on the profitability of banks in the Emirates.

Banks in the UAE are forecast to maintain strong capital and profitability as government infrastructure spending in Dubai, as well as Abu Dhabi's fiscal stimulus package will bolster economic growth, Moody’s Investors Service said in a report last week.

The UAE Central Bank expects growth to reach 2.8 per cent this year and 4.2 per cent next year. The banking sector overall is also expanding with credit growth to the private sector rising 6.5 per cent in the first nine months of this year, Mubarak Al Mansoori, the Central Bank's Governor, said last week.