With the waft of National Day celebrations still swirling, it might seem churlish to point out that the origins of the UAE banking system are older than the country itself. But that is the case.
In the 1960s, foreign banks (notably the British Bank of the Middle East, long since swallowed by HSBC) were the mainstay of the Emirates' financial system, until in 1963 Sheikh Rashid bin Saeed Al Maktoum founded National Bank of Dubai.
The 1960s was a time of intense activity in indigenous banking, with Mashreq and National Bank of Abu Dhabi founded later in the decade.
The sector has changed dramatically since those early days, of course, but the point is this: banking and finance have always been a priority of the UAE’s national strategy, even when that strategy was in an embryonic phase.
The establishment of the Central Bank in 1980, to oversee and regulate the business of the commercial banks, underlined the central position of banking in the UAE, and the interconnection between the Government and the financial industry.
Jump forward to 2013, and the trend has been further consolidation of the partnership between the state and finance.
According to a recent report by the credit ratings agency Moody’s Investors Service, banks in the UAE continue to enjoy high levels of government support for four reasons: the integrated policy role of the banks in economic strategy; the dominance of the domestic banks in public and private-sector finance; the concentrated nature of the industry, with the top four banks holding half of all deposits; and significant government shareholdings in many banks.
The system has undoubtedly worked well. As Moody’s also points out: “Over the past 35 years, no depositors or bondholders have lost money, a trend maintained during the recent financial crisis”. In all that time, only one bank and two other financial institutions have had government aid in extreme financial circumstances.
That is a very good record set against the carnage experienced by American and European banks.
Swift intervention to guarantee deposits in 2009 and inject liquidity into the system during the credit crisis prevented the high-profile banking fatalities that afflicted other countries.
Of course, the crisis put a strain on the UAE banking system, as it did throughout the world. Asset values declined, especially in the property sector where local banks were heavily invested; non-performing loans increased in both retail and corporate banking.
It looks like this phase of UAE banking history has come to an end. Moody’s has had the sector on “negative” outlook since January 2009, but recently, some might say belatedly, upgraded this to “stable”.
The improved economic environment in which UAE banks operate is one reason for the brighter prospects. With the indicators soaring in the key sectors of trade, transport and tourism, and property values recovering, problem loans are declining and profit levels increasing.
The capital requirements put in place to ensure a global crisis would never again hit UAE banks so badly are proof against even a protracted global recession and fall in all prices, Moody’s says.
This is good and timely news, because the UAE, and especially Dubai, is entering a phase of the economic cycle that will require its financial institutions to be in top working order.
Despite the turnaround in economic fortunes, Dubai still faces a debt repayment bill of about US$85 billion by 2017, according to recent IMF estimates. And repaying this will coincide with the early phases of the UAE's significant investment to prepare for Expo 2020, estimated by Deutsche Bank to be as high as $43bn in total.
Both are chunky figures, but perfectly manageable for a $360bn-a-year economy like the UAE’s.
Dubai is already working on chipping away at some of its debt via asset sales, and the emirate’s strong economic performance has enhanced its ability to raise longer-term debt in the international bond and, increasingly, sukuk markets.
The UAE has always supported the banking system, and vice versa. In the next few years, that synergetic relationship will have to be exploited to the maximum.