Amlak and Tamweel: the great debate

The headquarters of Tamweel, one of the two largest homelenders in the country.

Policy makers have been trying to sort out Amlak Finance and Tamweel, the country's two largest home lenders, since November. Both had been doing brisk business until a couple of months earlier, when the credit markets collapsed and scuppered their business models. Without access to cheap financing, they had no money to lend. Neither has yet been granted a banking licence, despite having applications pending at the Central Bank. Trading in the shares of both companies has been halted and shareholders have been kept in the dark about the future of their investments. At one point it was announced the pair would be merged with two other institutions. Now it looks like this may not happen.

Desperate shareholders have launched a "grey" or unlicensed market in the shares of the two companies, and even the executives of Amlak and Tamweel are getting frustrated. Many managers at the lenders privately admit a sense of frustration as they find themselves in limbo. "The Government moved its deadline for a solution so many times. I am growing weary and impatient. Feel free to write that," says Sheikh Khaled bin Zayed, the chairman of Tamweel. Here, then, are some questions and answers from The National:

qWhat is happening with the proposed four-way merger between Emirates Industrial Bank, Real Estate Bank, Amlak Finance and Tamweel? aIncreasingly, it looks like this supermerger will not happen. Instead, Emirates Industrial Bank and Real Estate Bank are likely to merge into one entity, called the Emirates Development Bank (EDB). The Government is still evaluating whether it makes more sense to merge Amlak and Tamweel or keep them as separate entities. At a meeting two weeks ago, the Federal National Council did not refer to the four groups together and government press releases have started discussing the mergers of Emirates Industrial Bank and Real Estate Bank and of Amlak and Tamweel as two different options. When the four-way merger was first announced, Emirates Development Bank was discussed as a kind of all-purpose bail-out vehicle. Now, it is talked about as a speciality financial institution that has roles that commercial banks normally shun, such as financing small and medium-sized businesses for Emiratis. One of the reasons for the discussion now of two different and separate mergers, according to an insider, is that officials at Emirates Industrial Bank and Real Estate Bank do not want to use all of the funds of any merged entity to support Amlak and Tamweel. It would render the new EDB incapable of doing anything else at its likely current funding level, they believe.

Will any of the money from the US$20 billion (Dh73.46bn) Dubai bond programme be directed to Amlak and Tamweel? According to the Tamweel chairman his company has not received any money from that pot. Amlak is also believed not to have received any of these funds. Will a solution for Tamweel and Amlak "save" Dubai's property market? It is a Catch-22: the property market will find a bottom only once demand comes back. But demand returns only if buyers believe in the stability of the market. The mortgage market in the UAE is very young. So far, only one in five property owners has a mortgage. Tamweel and Amlak account for more than half of that market, with a combined book of about Dh35bn. Despite the impression the flashy bank advertising might give, it is much harder to get a mortgage today than a year ago and even if formal criteria are once again being eased, this takes time to filter through to those approving mortgages.

What role can the government play in the restructuring and how would the new company or companies be capitalised? The government could either buy the two lenders' loans, their assets and/or make a private placement, meaning a new owner injects fresh equity and gets a stake in return. Alternatively, banks could step in to buy some of the assets. Both lenders suffer from the widening gap between their income stream - mortgage payments - and their debt payments. This situation is made worse as both suffer from a funding mismatch: they lend long term, but fund large chunks of their business with short-term loans. In the case of Tamweel, half of its funding comes from the interbank market, which has dried up during the credit crunch. Neither of the lenders has a banking licence. Unlike banks, they cannot take deposits.

So if the supermerger does not happen, what role is the Emirates Development Bank likely to have? Members of the Federal National Council said the Emirates Development Bank would not infringe on other banks' business and would focus on building infrastructure by supporting small and medium-sized businesses owned by Emiratis. "The goal of this bank is not to go into competition with other banks, public or private," said Sultan al Qubaisi, an FNC member in favour of creating the EDB via a merger of Emirates Industrial Bank and Real Estate Bank. The Government has pledged to inject enough funds into the merged bank to bring it up to Dh5bn, which means that it will not be a huge entity. There are already several government funds that support small and medium-sized businesses owned by Emiratis, such as the Khalifa Fund in Abu Dhabi and Ruwaad in Sharjah, which focus on helping Emiratis start up manufacturing businesses and smaller property projects. The Emirates Development Bank could play a role in providing better financial infrastructure for these funds, acting as their financial arm, an insider says, boosting their abilities and making the process of supplying funds more rigorous. Among the other areas that the FNC discussed as ripe for investment by the EDB are agriculture and urban housing.

Are there any other possibilities being discussed for the EDB, aside from investing in small and medium-sized businesses? Economists and some banking executives have been calling for the creation of an entity that could guarantee mortgages from reliable buyers, something akin to Fannie Mae, the Federal National Mortgage Association, in the US. Such an entity, they say, would help lower the cost of borrowing to buy a home and help the property economy recover faster. Nasser Saidi, the chief economist of the Dubai International Financial Centre, wrote an opinion piece in these pages in May calling for such an institution as well as a mortgage insurance company, saying that these ideas would "help revitalise both the property market and construction sector, and give a strong boost to housing finance". There is discussion in government circles about giving the EDB some of these roles, according to Mahmood al Mahmood, the chief executive of the Abu Dhabi developer Al Qudra Holding. However, Mr al Mahmood said, any decision to form a "UAE Fannie Mae" should be made only after heavy deliberation. "There is a lot of homework to be done from our side," he said. "We need to look at the market requirements." The vital point is to wait to create such an entity until the necessary regulations are in place for the property economy. If there is no law that holds a developer accountable to delivering a building within a certain amount of time, then it could expose a mortgage guarantor to extra risk. While there are laws in Dubai governing the property sector, laws in other emirates are still being developed. "Any solution that is going to increase the efficiency of this market is going to be a big plus for everybody," Mr al Mahmood said.

When will there be some resolution on this and a clear outline given of the EDB's activities? The Federal National Council has delayed its decision and further discussions of the EDB until after the summer, which means the earliest we would see a decision is December, analysts say.