Dubai to create mega-mortgage provider

Dubai to create mega-mortgage provider

But is the proposed merger between Amlak and Tamweel good for the local banking sector?

October 5, 2008 9:17 by kippreport

It would be tempting to read the announced merger talks between Amlak Finance and Tamweel, the two biggest UAE merger providers, as an ominous omen. This is especially true given the pessimism that now stalks the financial sector – both globally and, increasingly, globally.

The National, the Abu Dhabi-based daily, declared it “the first signs of fallout from a global wave of consolidation that began on Wall Street.”

That may be the case, but, it is worth noting that a coming wave of consolidation has been the talk of the UAE banking and finance sector long before the recent mayhem on Wall Street.

Last year’s landmark merger between Emirates Bank and National Bank of Dubai to create the largest Gulf bank by assets, Emirates NBD, has been praised as a smart move on the part of Dubai’s leadership in market which many says simply has too many banks. Like Amlak and Tamweel, both those banks were owned by the Dubai government.

And that merger took place long before Lehman Brothers went bankrupt and the US economy went to hell in hand-basket. In other words, global mayhem and local mergers are not necessarily related.

Most analysts quoted in the press have praised Amlak-Tamweel move, saying critical mass is needed to thrive, or perhaps even survive, in a market where banks are having difficulty financing the UAE banking sector’s explosive growth in loan portfolios. In a bid to help cash-strapped banks, the government recently announced it was injecting $13 billion into the markets in the form of special lending.

Markets seemed to welcome the move even while some feared it would do little to stem the tide of borrowing that threatens the local banking sector.

A point lost in all the praise for the surprise Amlak-Tamweel announcement: The move could have adverse affects on the UAE’s banking sector as it will likely reduce banks’ ability to profit on one of the most promising areas of a highly competitive environment – mortgages.

According to central bank data, mortgage lending rose 55 percent in March compared to one year previously, from Dh 41.86bn to Dh 64.95bn.

Yet there is still more room for growth, as the UAE still lags behind more mature markets in terms of mortgage penetration. Demand for mortgages continuing to soar even while fears of a property market correction are increasingly voiced aloud.

In a crowded environment with over 50 domestic banks, UAE lending institutions are therefore hoping to make a lot more money from the mortgage business.

But Tamweel and Amlak dominate the local mortgage business, with 34 percent and 29 percent local market share respectively. Another 23 providers – mostly banks – have the rest of the market.

Creating a mega-mortgage provider with over 60 percent market share would likely put a big dent in banks’ plans to cash in on home loans.