UAE Banks Draw Funds Despite Tensions


Economic News

22 Jul 2010
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New 2002 figures showed the UAE’s banking sector continuing to show robust results in drawing investment, despite uncertainty over Iraq. Meanwhile, UAE Central Bank officials began speculating on future monetary union between Gulf Co-operation Council (GCC) states.

A Central Bank report released January 26th had deposits with the UAE's 47 commercial banks jumping Dh15.5bn ($4.2bn) during the first nine months of 2002. By September, the total stood at Dh198.3bn ($54bn).

The larger part of the deposits had also been made by residents, showing that local faith in the banking system remained high, even at a time of regional tension. Market watchers also commented that the boost in investment indicated a return in part of overseas funds, as there was a growing reluctance to invest abroad after recurrent market upheavals.

"There is a steady increase in domestic liquidity and this points to a return of funds from abroad, despite regional tension and low interest rates on deposits," Ziad Dabbas, share dealing director at the government-controlled National Bank of Abu Dhabi, told Gulf News.

Naturally enough, the hike in depoists also resulted in a hike in credit extension, with a wide range of new loans offered around the UAE’s industries.

The Central Bank figures showed credits rising from Dh145.3bn ($39.5bn) at the end of 2001 to Dh158.2bn ($43bn) by the end of September 2002. Most of the increase was accounted for by credits to the domestic private sector, which totalled Dh136.8bn ($37.2bn).

Demonstrating a major increase in imports and non-oil exports, trade was the main destination of domestic credits, taking a hefty Dh47.3bn ($12.8bn) chunk of the total.
Next in line for credit was the construction sector, which took Dh27.2bn ($7.4bn) in credit, followed by industry, with Dh9.9bn ($2.7bn).

This left the banking sector with September 2002 combined assets of a record Dh314.4bn ($85.6bn), second highest in the Arab world after Saudi Arabia and up Dh15.4bn ($5.2bn) on year end 2001.

Despite all the new activity, combined capital adequacy still stood at 12.7% -- way over the 8% international floor level and demonstrating that the UAE’s banks should be capable of handling any financial crises arising out of the current uncertain on Iraq.

As such, it was perhaps a good time to begin talking about the future, a point taken up by Central bank officials who had gathered at the Zayed Centre for Coordination and Follow-Up later the same day to hear a speech by Luxembourg central bank governor Yves Mersch. The European Union was held up as a good model to follow in the lead up to monetary union between the GCC states, planned for 2010.

"Initially," UAE Central Bank Governor Sultan bin Nasser Al Suwaidi told the conference, "the single GCC currency will be pegged to one currency -- but which one we cannot say yet as things will change by 2010. However, it will be one currency peg and not a basket of currencies," Reuters reported.

Despite this obvious hint that the currency chosen would be the Euro rather than the dollar, Mersch himself was reportedly none too taken by the idea of the prospective currency being pegged to anything. Gulf News reported him as saying this meant sacrificing control of interest rates and losing flexibility in responding to regional developments. He also pointed out that while the GCC states were closer in cultural and linguistioc terms than the EU ones, trade between them was only some 7% of total GCC exports, whiole in Europe the figure was around 51%.

However, Mersch said that the GCC states were excelling in three out of four of the EU’s Maastricht convergence criteria -- exchange rates, inflation and interest rates. "The challenges facing GCC may seem less daunting than those the EU faced 10 or 15 years ago," Gulf News reported him saying. "With sufficient political support these problems can be overcome."

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