Mind the gargantuan gap

Mind the gargantuan gap

Bank loans exceed their deposits by AED110 billion ($30 billion). Here’s how it happened.

March 10, 2009 10:04 by Dana El Baltaji

The UAE’s banks are in trouble. As a group, banks have a shortfall of AED110 billion between loan and deposits, which is technically illegal in the UAE. As a result, banks are scaling back on loans in a bid to bridge that gap. However, according to Sultan Al Suwaidi, the UAE Central Bank Governor, that’s not enough.

Al Suwaidi explained that the central bank’s decision to keep the nation’s currency pegged to the US dollar coincided with the global spread of the financial crisis. Previously, foreign investors deposited funds into the UAE’s banks in the hopes that the dirham would be depegged from the dollar, and the value of the dirham would rise.

However, given the central bank’s decision, investors removed their ‘hot money’ from the UAE, resulting in a sizeable gap between loans and deposits in the UAE.

“The current situation requires a stimulus plan for banks and the economy in view of this ‘gap’ which could be bridged in collaboration with the Ministry of Finance to boost UAE local banks’ blankets so that they would receive again deposits from encouraged global markets,” Al Suwaidi said on March 9 at the 10th meeting of the Dubai Economic Council, according to a statement published on WAM.

In 2008, the central bank set up a AED50 billion facility to help boost liquidity, and has guaranteed all local, and a number of foreign lenders.

Last month, the UAE government announced a $20 billion package to help stimulate the economy; the UAE Central Bank bought $10 billion worth of bonds issued by the emirate.