Why your dirhams are safe

Central Bank says institutions are solid. Total mortgage lending by UAE banks does not pass 11 per cent of assets and 1 per cent of deposits.

ABU DHABI, UNITED ARAB EMIRATES - June 22, 2008: The main entrance at the Central Bank of the United Arab Emirates in Abu Dhabi. ( Ryan Carter / The National ) *** Local Caption ***  RC002-CentralBank.JPGbz23financesector.JPG
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While countries such as Germany, Ireland and Greece have rushed to guarantee all customer deposits in their banks, bankers and analysts say deposits in UAE institutions are safer. International banks may have only a limited guarantee from their governments, they said. But the Central Bank reassured depositors when it announced an interest rate cut on Wednesday.

Khalil Mohammed Sherif Folathi, the chairman of the board of the Central Bank, said the bank sector in the UAE was solid. "The total mortgage lending by the banks in the UAE does not exceed 11 per cent of the total assets and 18 per cent of the total deposits. This is clearly below the 20 per cent level approved by the law," he told WAM, the national news agency. Marios Maratheftis, the regional head of research at Standard Chartered bank, also said the public's money was safe. "There hasn't been any pressure for an explicit deposit insurance system," he said. "Liquidity is available at low costs and we are insulated from what is happening in the West."

Mr Maratheftis said that wide-ranging bank guarantees were implemented in the West recently because of a collapse of confidence, which was not the case here. In addition, he said a government guarantee would send the wrong message to banks - that they could behave irresponsibly knowing a bailout safety net was waiting for them and their depositors. Raj Madha, the director of equity research at EFG Hermes, said the banks had a minimal exposure to wholesale markets and the Government's large reserves would be sufficient to bail out any banks, if needed.

However, while there was no need yet for a deposit insurance scheme, one would be welcome because of the stability it would bring, he said. While an informal, personal guarantee worked in the past with a less complex financial system, in the future if a local bank has exposure to a problem and losses mount up, it could spread throughout the system. "It's a very cheap, effective solution to a problem that could arise at any point," Mr Madha said.

The desire to avoid a GCC version of the western crisis has been illustrated by Saudi actions. The Saudi Arabian Monetary Agency has said it was ready to provide as much as 150 billion Saudi riyals (Dh146.25bn) to protect deposits held in the kingdom's banks. This is because of past banking crises where the government has stepped in, the fact that most institutions are state-owned anyway, and because a vast pile of reserves would back up any potential capital shortage that could precede any banking collapse.

Past experience suggests no government bank in the UAE will be allowed to fail. In the 1980s, the banking sector faced a crisis that resulted in eight banks being consolidated and recapitalised into several institutions. In 1983, the Central Bank and the Dubai Government bailed out the Union Bank of the Middle East, then the emirate's third-largest bank, for US$380 million (Dh1.39bn). In response to the crisis, the Central Bank took several measures to strengthen the banking structure by imposing more control. It expanded audits and inspections, monitored and placed ceilings on lending activities, and set up minimum capital requirement of at least Dh40m.

ozaafrani@thenational.ae afoxwell@thenational.ae