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Are UAE banks broke?

Are UAE banks broke?

Despite government bailouts, tight liquidity persists throughout the Emirates.

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May 7, 2010 10:18 by



The news is not all negative. After statements that S&P needed more explicit reassurances from the government, its April announcement reflected renewed confidence in government support. The agency upgraded Mashreqbank and affirmed its ratings for Abu Dhabi Commercial Bank, National Bank of Abu Dhabi and Dubai Islamic Bank, removing its negative watch status from the banks.

While the central bank governor Sultan Bin Nasser Al Suwaidi said last year that liquidity noticeably eased by April of 2009, the effects had persisted. Construction companies and consulting firms were not the only ones hurt. According to a principal at consultancy Booz & Co., Daniel Diemers, private banking and wealth management saw the dramatic effects of the liquidity crunch peak from September 2008 to May of 2009.

“The average client of the Middle East in the UAE was someone who had a lot of family wealth, yes, but that wealth was largely tied up in family businesses that needed capital,” he says. “If you own a family business you can literally take cash from the business to [to make investments]. Of course, you can indirectly leverage.” Families with enormous wealth are under pressure to create and sustain the lifestyles of large families with dependents and to maintain viable businesses. Many families, like their banks, were highly leveraged and were reluctant or found it difficult to sell their investments when prices dropped. “Some people have very nice investments, like the $30 million villa, but this is not a commodity,” Diemers says. “You cannot just throw it on [the Web site] Dubizzle, it is so customized and bespoke.”

But Diemers says that private banks in the UAE and Middle East were less affected than those in developed markets. And many in banking have acknowledged the advantages of the Nakheel restructuring. “Although the recovery of the property sector is likely to take some time, we expect a timid recovery in construction, albeit from a low base,” the Japanese bank Nomura wrote in a recent report. “The Dubai World restructuring, which will settle many outstanding liabilities to contractors (even if for less than total amounts due) should help revive activity in the sector since many construction projects have been stalled by a lack of liquidity.”

The restructuring of one company, though, does not resolve the problem. In October 2008, the federal government said it would guarantee deposits in all UAE banks for the next three years. Gulf-wide, governments have spoken openly about introducing new regulations such as increased loan to deposit ratios, something that will affect the private banks as well as retail and commercial banks. “Any liquidity rule on the banks with deposit ratios of x amount, this clearly will affect the private banks,” Diemers says. “They will fall under the liquidity regimes.”

The UAE’s central bank is a net saver, and sources say that it has significant resources to draw on if banks demonstrate that they need the loans. But the lack of liquidity can only be resolved permanently if the banks are open about their losses.

- Trends magazine.



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3 Comments

  1. Anupama V. Chand on May 10, 2010 2:55 pm

    As I see it, there are two problems that the UAE is going to have to primarily handle. I would like to clarify at the outset that I am no financial whiz nor indeed any kind of economic analyst, and would not dare to presume such a position. However, as a lay person who has been a resident of this country over the last 15 years on and off, I have to say that transparency of the country’s financial institutions has become its biggest Achilles heel when it comes to attracting long-term foreign investment, and detracting long-term debtors from bolting into the blue, causing millions of dirhams to disappear, which could in any country with legitimate and transparent financial rules have been retrieved through bankruptcy procedures.
    Most international investors with very systemic procedures would hesitate before investing in such a country, let us be realistic in examining our flaws here. It is also a bit of a catch 22 trying to be transparent in the UAE, where the tradition of declaring things upfront has never really been valued. One must certainly not live in the delusion that there is no wealth in the UAE, or that the country as a whole is facing a liquidity crisis, that would be too premature. Abu Dhabi is considered to be one of the wealthiest cities in the Arab world, with hitherto undisclosed reserves of wealth, which if push came to shove, it could certainly help Dubai out with. Dubai for its part would need to overhaul its banking, insurance and financial systems and procedures, so that it is not just a question of showing transparency and convincing the world at large, but making it credible enough for residents, citizens and any average man-on-the-street to know that his money is saving. This in times of recession, when the Emirate is exposed to international markets that are reeling under a fresh wave of shake-ups is going to be the biggest challenge. The international media has not given Dubai an easy time of it either, trying to knock it down in its beleagured state, and deliver the final blow….Dubai has recovered much better than expected, however much needs to be done to bring back the vibrancy that existed. Time perhaps to take stock and re-evaluate.

     
  2. Baker on May 11, 2010 9:32 am

    Delaying paying contractors and/or consultants by government or semi government entities has been endemic in this area for as long as I have been there (35 plus years). Often on the flimthiest of excuses.
    Now of course we have the mother of all excuses: the world economic situation.
    What is conveniently ignored is that many of these mega projects should never have been awarded in the first place because their finance to enable completion was not properly arranged.
    That being said, I sincerely hope all will be sorted out somehow and soon because it is still a great place.

     
  3. Miss Anne Thropic on May 11, 2010 10:30 am

    If I was a bank, I’d be very wary about loaning anyone any money right now, whether it’s a big company or an individual. So many projects in Dubai were built on credit and won’t be completed any time soon. That had to stop, as does the rampant offering of higher and higher credit limits on cards for personal customers. Encouraging debit card usage instead of harassing customers with irresponsible credit card offers would be a step in the right direction too.

     

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