UAE sets up Dh50bn emergency credit fund

The Central Bank of the UAE has set up a lending facility for banks aimed at easing a credit crunch.

The Central Bank of the UAE, Abu Dhabi.

The Central Bank of the UAE has set up a Dh50 billion (US$13.6bn) emergency lending facility for banks aimed at easing a credit crunch that threatens to slow infrastructure projects and hurt a property market that is at the core of the country's economy. The move signals a significant departure from how the bank has conducted monetary policy in the past. "This would be the first time that the central bank would have something like a discount window," said Ahmed el Shall, the chief financial officer at Dubai Bank, referring to the way banks can borrow money from official sources. "It will be totally new to their modus operandi." Bank funding costs have been rising for months and skyrocketed last week amid the global credit crisis last week. Banks across the globe have been pouring money into their financial systems to ensure credit is available, but UAE officials had so far held back. But, as local banks became cut off from international markets, more urgent action was needed, according to business and banking leaders. The central bank's move, however, failed to excite the stock market, as investors cashed in on their gains yesterday, leaving markets slightly down following Sunday's historic rise. The Dubai Financial Market (DFM) financial index, which tracks many of the banks targeted by the Central Bank's lending facility, fell 1.07 per cent, slightly less than the rest of the bourse. According to Amro Diab, the head of GCC institutional sales at EFG-Hermes, stock markets in the UAE showed little reaction to the bank's announcement, which arrived late in the trading day. "We would have liked this to happen earlier, and although we have to wait to see if it is enough, it is definitely a step in the right direction," said Mohammed Ali Yassin, the managing director of Shuaa Securities in Dubai. A major concern is the property market, the main engine of the country's non-oil economy. Without access to global markets or more deposits to lend against, financing for the purchase of property could shrink dramatically. "The fundamentals of the economy are so strong, you don't want something to slow that down," said Wasim Saifi, the chief executive officer of Tamweel, the country's second-largest mortgage lender. "If domestic liquidity dries up then the ability of the mortgage companies will be affected." The Dh50bn facility will make up about 5.6 per cent of the domestic credit market, which totalled Dh894bn in June, according to calculations by Standard Chartered Bank. Analysts predict the facility will allow banks to borrow from each other more cheaply, thereby reducing the likelihood that any UAE banks will collapse from a lack of short-term spending money. Although injecting cash into the economy may have the effect of further raising already high inflation rates, "this negative effect is minimal compared to the benefits", said Mahdi Mattar, the chief economist at Shuaa Capital. "The first immediate effect we will see is a decrease in the interbank rate and banks will see their interest margins released from pressure," Mr Mattar said. "This will also definitely have an effect on inflation rates, though this negative effect is minimal compared to the benefits." Lending rates between UAE banks rose last week when international banks stopped offering funds to them following the collapse of Lehman Brothers and the emergency bailout of American International Group (AIG). The central bank also announced that 90 per cent of the speculative "hot money", which had increased cash availability for banks in the UAE, had left the country last week. In June, the three-month Emirates interbank offered rate (Eibor), which tracks how much banks charge to lend money to each other, stood at a mere 1.87 per cent. However, by the end of last week it had nearly doubled. The central bank's move yesterday was an attempt to bring it down, analysts said. They expressed doubts that the facility would be enough to stem the UAE credit crunch completely. The central bank had already "reviewed additional resources available with Central Bank for providing further support to banks operating in the UAE if required," it said in a statement. "This is not the end of the road, it's probably just the beginning," Mr Yassin said. "Reserve requirements for banks can also be lowered and they can find other ways to put liquidity into the system." The government could even use some of its money to invest in equities and regional markets in order to promote market stability, he said. Banks in the UAE struggled yesterday to uncover the details of the facility after the announcement was made. "We're still trying to get in touch with the right people to find out exactly how the mechanism is going to be put in place," said Mr Shall. The most likely possibility was that the Government will buy government and "quasi-government" securities from banks in exchange for cash, in order to give them enough money to operate on a day-to-day basis, said Mushtaq Kahn, a regional economist at Citigroup. Acceptable securities could be Government of Abu Dhabi securities and securities from the Dubai Electricity and Water Authority (Dewa), according to Reuters. [e-mail] [e-mail]