UAE SHIFTS FROM BORROWERS TO A LENDERS MARKET

If we look into the UAE banking sectors in the year 2016, it is quite clear that compared to previous years, banks are now preferring asset based fundings. They have become more prudent in lending as deposits have shrunk which is primarily because of a prolonged period of lower oil prices and increasing bad debts. The main focus of banks are now controlling operating costs and maintaining asset levels and quality rather than targeting growth in their business portfolios.

An analysis reveals that a drop in deposits is also promoting a more conservative lending policy and hence the profit margin for the banks will be harder to sustain. As a result of this policy, the market in general and the SME sector, in particular, will be adversely impacted as they are more volatile to banking norm fluctuations.

If we look at recent history, subsequent to the global financial downturn during the 2008-2010 period, liquidity began to flow back into the banking system in 2010- 2011, aided by the strong price of oil. For the past four to five years, UAE banks have had a consistent growth run, in which they have had no substantial credit losses, a better asset quality and Banks are now more risk-averse when choosing who to lend to avoid credit losses. They have tightened their credit policy for customers in the current year and choose their customers after a stringent screening process. The UAE Central Bank said in the beginning of the year; “In the past, the main challenge for the banks was that they had a lot of liquidity in place and they had to place it into yield-earning assets, which was why the retail side of the business was strong.” But now the situation is different. Banks are now more conservative since it is harder to pump in liquidity into the system.

“Banks have tightened their credit policy for customers in the current year and choose their customers after a straight screening process”

Banks are now more risk-averse when choosing who to lend to avoid credit losses. They have tightened their credit policy for customers in the current year and choose their customers after a stringent screening process. The UAE Central Bank said in the beginning of the year; “In the past, the main challenge for the banks was that they had a lot of liquidity in place and they had to place it into yield-earning assets, which was why the retail side of the business was strong.” But now the situation is different. Banks are now more conservative since it is harder to pump in liquidity into the system. Though economic headwinds are strengthening, the experience of UAE banks in implementing stringent controls during the global financial meltdown in 2008-10 gives them confidence. UAE is in the process of the paradigm shift from oil-driven economy to non-oil driven, consumption-oriented economy. The results of this have already started reflecting in different sectors and this will help the banks to regain their lending swagger within a short period of time when liquidity increases.

PLUNGE IN DEPOSIT

The UAE is the world’s sixth-largest oil producer. It uses revenue from sale of crude oil to fund more than 60% of the federal budget. Since the year 2014, the price of crude oil has come down by more than 70% of its peak value and the slowdown in economic growth resulted in less demand and more supply. The reduction of oil prices also resulted in less spending on infrastructure compared to previous years. Referring to central bank statistics, S&P noted that government and public sector deposits fell 14.2% to $94.1 billion (Dh 346 billion) towards end of 2015 from $109.7 billion (Dh 403 billion) in the previous year. This has been a key factor in tightening business lending.

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