Banks have not yet dipped into the emergency liquidity facility the Central Bank has set up to cushion the impact of Dubai World's debt rescheduling on the country's banking sector. Analysts say the reluctance of lenders to draw on the special fund suggests that the banking system has not suffered from a significant withdrawal of deposits.
The regulator pledged its support for lenders in the UAE and offered emergency funds to avert any liquidity shortages last month after an announcement that Dubai World was seeking to delay debt repayments to bondholders and creditors as part of restructuring plans. Bank loans account for more than half the total debt of US$22 billion (Dh80.76bn) Dubai World is hoping to restructure, estimates from analysts indicate.
But a senior official at the Central Bank said yesterday that no banks had made use of the facility yet. "Banks are in no need for liquidity right now," added the official, who asked to remain anonymous. The Central Bank has maintained that the health of the banking sector has improved since last year despite its exposure to the Dubai World debt situation and a rise in loan delinquencies as a result of the global credit crisis.
After months of focusing on tightening lending and setting aside provisions to cover non-performing loans, banks have been gradually restoring their capital adequacy levels. This trend may mean lenders are better prepared as they map out a repayment timetable with Dubai World. "The Dubai World announcement caught everyone by surprise but, to a certain extent, banks have been building reserves," said Deepak Tolani, an analyst at Al Mal Capital.
"Capital adequacy levels are high, averaging 18 to 19 per cent, and can help provide a safety net." The purpose of the emergency facility was primarily to reassure investors of the regulator's backing rather than to plug a specific liquidity hole in the banking system, said John Tofarides, a banking analyst at Moody's Middle East. "It was a pre-emptive measure and helped avert any significant withdrawal of deposits that could have happened over concern about banks' exposure to the Dubai World debt restructuring," Mr Tofarides said.
Many lenders have yet to reveal the extent of their exposure to Dubai World. UK banks are known to form the single largest group by country of origin, with exposure believed to be more than $5bn. The size of the liquidity facility has not been fixed, with any funding determined by an individual bank's needs, said the Central Bank official. The cost banks pay to borrow from the facility would be lower than that charged by previous funding vehicles established by the Government in the wake of the financial crisis.
The interest rate set by the Central Bank is the three-month Emirates interbank offer rate plus half a percentage point, which works out at around 2.4 per cent currently. In October last year, the Central Bank introduced a Dh50bn emergency lending facility, which banks have hardly used. Lenders have to pay an interest rate of 2.5 per cent on that facility. In another move aimed at easing liquidity strains on the banking system, the Government announced last year it would make up to Dh120bn available to banks across the country under several lending programmes. The interest rate charged on funds from those facilities is 4 per cent.
@Email:tarnold@thenational.ae
