THE UAE's banking community is an essential ingredient in the mix that has turned the country into a major trading centre. It has grown up on the dynamism of local trading skills, and the finance and insurance sectors now account for about 5 per cent of gross domestic product. The 19 local and 28 foreign banks have a combined local network of 326 branches and Dh 155,000 million in assets. With the odd exception, profits grew by at least 10 per cent in the last financial year. The system has also proved resilient: it has survived the financial turmoil of the Kuwait crisis and the closure of the Bank of Credit & Commerce International (BCCI).

In the light of those twin dramas, the banking system has focused on consolidation and due caution in its current activities. The central bank, in particular, has started to play a more assertive role, introducing new rules that set high standards. It wants to strengthen the sector and allay any international worries about its credibility. In May 1993, the central bank announced that all UAE banks should achieve a 10 per cent capital adequacy ratio by the end of the year. The ratio was 2 per cent higher than the 8 per cent guideline issued by the Bank for International Settlements (BIS) and was intended to drum in the message that UAE banks are not only prudent, but exceptionally so. During the first quarter of this year five banks said they were considering increases in capital. This was to expand their capacity but the essential motivation was the need to satisfy the stiff new capital adequacy requirements. The five banks are Dubai Islamic Bank, Commercial Bank of Dubai, National Bank of Ras al-Khaimah, National Bank of Fujairah and United Arab Bank.

A series of lesser regulations covering foreign exchange houses, the display of interest rates, and the way loan rates are expressed are similarly intended to promote the virtues of transparency and probity. The central bank is also reported to be considering a deposit insurance scheme.

The ruling, in October 1993, that a bank could not lend a sum which was more than 7 per cent of its capital base to a single customer, was less well received. The complaints from local banks were muffled but foreign banks made known their displeasure. Customers could be an individual, company or group of companies under common ownership. That was less of a problem than the definition of capital as local capital. When it came to calculating their capital adequacy, foreign banks could use their global capital but when it came to the new local lending rules, they could not. Adjustments have ensued as a result of their protests. The ratio is now applied to non-balance sheet exposure. But it is assumed that foreign banks will start to book some loans to local borrowers outside the emirates as a result of the ruling, which they still consider discriminatory.

That may create more openings for local banks in a market which is highly competitive. 'I don't think foreign banks booking offshore is a good thing....It's going to push up their costs and create opportunities for local banks,' says Anwer Sher, acting chief executive at Union National Bank, the successor to BCC Emirates.

In other respects, the outlook in the sector is bullish. The short-term lending for trading activity which is the core business of most of the banks is still buoyant. 'In spite of the most pessimistic expectations that the momentum of growth in 1990-91 could not be sustained, the UAE has done much better,' says Sher. Financial problems and the slowdown in trade to Iran, traditionally the largest regional re-export market, have had little impact. 'The knock-on effect of Iranian non-payments has not been felt. People built up enough profits from the past trade and built-up margins enough to accommodate the present slowdown,' says Sher.

Local traders are also contemporary in their strategy, importing to meet demand rather than trying to anticipate it. Says Sher: 'Inventory levels are now quite low, so less money is tied up in stock.' The local trading community is also adept at finding new outlets when existing ones lose their shine. 'We are fortunate in Dubai - we may be affected by a down but then we are compensated by an up somewhere else,' says Sulaiman al- Mazroui, chief manager for marketing at Emirates Bank International (EBI). The boom in mostly consumer electronics sales to Commonwealth of Independent States (CIS) citizens, now said to be worth about $1,000 million a year, has taken up much of the slack caused by the hardships in Iran.

Local banks are also confident that the competition makes them responsive and encourages them to keep abreast of service and product developments in the industry. 'The emirates are overbanked so there is fierce competition (and) banks are becoming very sophisticated due to the competition. As a result you will always see products and services being extended - cards, loans, car finance and, of course, trade finance,' says Al-Mazroui.

The frank admission that the UAE is overbanked begs the question of mergers. The issue is hardly a new one. Two of the top four local institutions - Abu Dhabi Commercial Bank and EBI - are themselves the product of earlier mergers. More recently, EBI took over the troubled Middle East Bank which it currently operates as a subsidiary.

The central bank favours greater concentration in the sector but UAE banks have only opted for mergers in the past as the price to be paid for greater government support. There is no formal central bank pressure for more banks to merge although there is private encouragement. 'We feel it from unofficial talk,' says Al-Mazroui. He approves. 'There should be mergers. You have to compete internationally. You need stronger banks, adequately funded with larger organisations.' Local bankers say mergers are probable in Sharjah where the banks are slowly recovering from the local government's debt problems which were resolved in the global settlement programme adopted in November 1992.

Formal approach

The freewheeling style that served the UAE well in the past is now being policed more formally as the emirates' importance as a regional trading centre grows. And, most bankers approve of the central bank's more active approach to regulation and supervision.

For the time being they are more concerned to ensure that the growth in their business in 1994 will match the performance last year despite conditions which seem less auspicious. The big local banks depend heavily on business from governments whose current infrastructure development programmes will be running for some time. Says Al-Mazroui: '1993 was a successful year. We are hoping for similar growth. There is scepticism in some areas and until the recession is gone, we are being conservative. We have enough experience to be confident.'