Strong UAE banking sector can cope with crisis

The UAE's Central Bank has drawn criticism for its oversight of the domestic banking system recently, but economists say that its actions have left banks better positioned.

The UAE's Central Bank has faced criticism following the financial crisis. But economists believe it has left the banking sector in a stronger position to deal with the challenges posed by a fresh euro-zone crisis. If the Central Bank had not provided funds to the country's lenders during the crisis, the outcome could have been very different, according to Brahim Razgallah, the chief economist for the Middle East and North Africa region at JP Morgan.

In September 2008, the Central Bank provided Dh50 billion (US$13.61bn) of liquidity support to the banking sector, followed a month later by Dh70bn in emergency loans from the Ministry of Finance and a blanket guarantee of bank deposits for three years.

More recently, the Central Bank's role has centred on reining in a lending free-for-all that helped to fuel Dubai's credit bubble.

A cap on consumer loans at 20 times salary, implemented in May, drew criticism. Limitations on car loans, which forced customers to make a 20 per cent down payment on new purchases, also prompted concern among dealerships after sales plunged. But the end result was a stronger banking sector less dependent on support from the Government in times of stress, Mr Razgallah said.

"Some banks had, in the past, high loan-to-deposit ratios of 140 to 150 per cent … [now] banks are much less reliant on the Central Bank to act as a lender of last resort.

"The implicit assumption of government support had always been an element in the past. Now there's much more awareness of how problematic that could be, especially during crisis times."