Gulf banks should start lending

Against the backdrop of the huge losses recorded by the world's financial powerhouses in the US and Europe, it is seemingly impressive that the GCC's top 20 banks recorded an average of 15 per cent asset growth in 2008.

However, many of the problems afflicting the Gulf banking sector today are a direct result of the overinflated balance sheets of the region's 20 largest banks.

In the summer of 2008, an anticipated GCC currency revaluation led to the arrival in the region of billions of dollars of speculative money. With such levels of liquidity in the system, banks took the money and lent it out over the long term.

When currency revaluation became an irrelevance with the arrival of the economic downturn in October last year, banks were left with a huge funding gap, which they have been struggling to narrow ever since.

As a result of their lending spree, the UAE banks' loan-to-deposit ratios hit an average of 105 per cent at the end of 2008.

The ratio at Emirates NBD, the region's biggest bank in terms of assets, currently stands at 126 per cent, down from an average of 142 per cent for 2008.

Banks have tried to woo depositors by offering attractive interest rates. This is yielding positive results in the UAE, where the gap between loans and deposits has closed from $31.6bn in January this year to $8.7bn.

However, attracting deposits at higher interest rates may be costly for banks, especially given their reluctance to lend any of the newly acquired money out to fund projects.

Further measures are needed to get the banks lending again.

Until that happens, neither the GCC's corporates nor the banks themselves can hope to make a sustainable recovery.