Banking and finance key fact

About 85 per cent of the region’s banks see weakness in credit information as an important obstacle to lending

Source: Emcredit

When the global financial crisis hit in October 2008, the Gulf’s central banks acted swiftly to shore up their banking systems.

Their expedience has proven critical in the ability of the region’s financial sector to weather the storm of the past two years. It also helps explain why GCC lenders are among the most well-capitalised banks in the world today.

During the first half of 2008, the central banks had been preoccupied with runaway credit growth and inflation. By the end of that year, their focus had turned to monetary easing and other stabilising efforts, such as guarantees on bank deposits.

Capital injections

The crisis prompted central banks to enact a slew of policy responses to combat tight liquidity conditions and low investor confidence. The most notable of these was cutting repurchase rates and lowering bank reserve requirements.

Less than half [of local banks] have fully automated application process systems and … rely on score cards

Zaid Kamhawi, Emcredit

Most central banks made sizeable capital injections in to the sector. Saudi Arabia’s central bank, the Saudi Arabian Monetary Agency (Sama), poured $3bn in long-term deposits into the banking system – its first direct injection of dollars in a decade.

Elsewhere, the UAE central bank set up a $13.6bn emergency bank lending facility to provide liquidity and Oman’s central bank allocated about $2bn to local banks.

But in triggering a spate of insolvencies and defaults at corporate and government-related entities, the financial crisis also exposed the regulatory weak spots inherent in the region’s banking system. This signposted a need to introduce more comprehensive guidelines. 

Customers took loans up to 80 times their monthly salaries. Banks were just as much to blame for it happening

Suvo Sarkar, National Bank of Abu Dhabi

In a bid to improve financial transparency, many Gulf central banks have established, or are in the process of establishing, credit bureaus.

In May, the Dubai government established Emirates Credit Information Company (Emcredit) as the emirate’s first official credit bureau. Emcredit will be the entity responsible for credit-reporting services in Dubai, through collecting, storing, analysing and disseminating credit information. Emcredit currently works with six banks in Dubai and has a 30 per cent data coverage of the banking population.

Gulf Banking Sector Capital Adequacy Ratios (percentage)
  Dec 2006 Dec 2007 Dec 2008 Dec 2009
Bahrain 22 21 18.1 19.6
Kuwait 21.2 19.4 17.1 18
Oman 17.2 15.8 14.7 15.5
Qatar 14.3 13.5 15.5 16.1
Saudi Arabia 21.9 20.6 16 16.5
UAE 16.6 14 13.3 19.2
Source: International Monetary Fund (IMF) 

“Regional banks are still relying on getting information from customers, mainly asking them for their three-month salary payslips,” says Zaid Kamhawi, chief business officer at Emcredit.

“Less than half have fully automated application process systems and instead are relying on primitive score cards and modelling.”

However, it will eventually become compulsory for all financial institutions across the emirate to join Emcredit’s database and supply the bureau with the credit information records required by it to function effectively.

On 3 November, Qatar announced it will follow suit, launching its first credit bureau in December. 

The Qatar Credit Information Centre will operate under the umbrella of Qatar Central Bank (QCB) and will be backed by local banks and the emirate’s bourse, the Qatar Exchange.

“The QCB attaches utmost importance to the investment climate in Qatar and is exerting efforts to create the appropriate atmosphere for investors from within and outside the country,” Sheikh Abdullah bin Saud al-Thani, governor of the central bank, told delegates at an investment forum in Doha in November. New legislation will also be introduced to improve lending transparency, Sheikh Abdullah said, without giving details of the laws.

Aside from the long-term benefits these bureaus will bring to the banking community, it is also hoped their establishment will help to get credit moving again.

Whereas most banks had an indiscriminate lending policy before the financial crisis, today they are reluctant to resume lending for fear of taking on more uncreditworthy customers.

Private lending obstacles in the Gulf

About 85 per cent of the region’s banks identify weakness in credit information as a “very important obstacle to lending”, according to Emcredit.

This has contributed to the sharp slowdown in bank lending since the crisis hit. The biggest short-term challenge facing the sector is to get finance houses to resume lending, especially to the private sector. 

UAE bank deposits exceeded loans for the first time in at least 23 months in October 2010 as total loans fell 0.1 per cent from a month earlier to $283bn and deposits rose 4 per cent to $286.8bn.

Saudi Arabian banks are also showing continued reluctance to lend to the private sector, despite money supply increasing and deposit growth of 3.2 per cent in September, marking its biggest monthly gain since early 2009.

Claims on the private sector in September grew only 3.6 per cent year-on-year to SR773.17bn ($206bn) and just 0.8 per cent from August.

In compiling data on consumer and corporate lending, the ultimate goal of Gulf credit bureaus is to create individual credit scores to assess which customers are worthy of loans.

Related to this, the UAE central bank is currently formulating a new multiple of earnings law that will force banks to tighten their lending criteria. 

Banks will calculate the size of a loan they can provide to a customer relative to their salary in an effort to impose a level of restraint and avoid any further excessive lending.

“Prior to the downturn, customers took out loans up to 60-80 times their monthly salaries. And the banks were just as much to blame for allowing this to happen,” said Suvo Sarkar, general manager of National Bank of Abu Dhabi’s consumer and elite banking division, speaking on the sidelines of MEED’s retail banking conference in September. 

Loans caps in the Gulf

The new regulation, due to be implemented by the end of 2010 or in early 2011, is expected to stipulate a multiples cap of 20-30 times a customer’s monthly salary.

Current central bank regulations state that the maximum size of a personal loan cannot exceed AED250,000, but banks found a way of circumventing this law during the 2005-08 credit boom, when assets were growing at more than 30 per cent annually.

Complications also arose from the fact that it was not clear what facilities it related to. Bankers expect the new law to cover all kinds of lending facilities including credit cards.  

The UAE central bank has been working on the law for about two years, with its importance having been highlighted by the recent surge in non-performing loans (NPLs) from customers unable to repay their debts.

The average NPL ratio of banks rose from 2.5 per cent at the end of 2008 to 4.3 per cent at the end of 2009, and is expected to increase to about 9 per cent in 2010. 

The combined provisions of Gulf banks increased from $6.8bn at the end of 2008 to $12.8bn at the end of March 2010. Meanwhile, provisions in the UAE have jumped 41 per cent in the 12 months through to August to hit $10.1bn, according to the central bank.

This has prompted the UAE central bank to tighten accounting rules that mandate lenders to book provisions covering NPLs every quarter. At present, most banks consider a loan non-performing when payments of interest and principal are overdue by 90 days or more.

The new regulation has been welcomed by analysts as a step towards greater transparency and accounting standardisation, which now makes it easier to make NPL comparisons between banks.

The new regulation also stipulates that lenders should build up general provisions equal to 1.5 per cent of risk-weighted assets over a period of four years, up from the previous level of 1.25 per cent.

Certainly, the global economic crisis has driven home the need for central banks to review their existing regulatory structure, more for some than others.

Saudi Arabian banks have benefited from the stricter regulatory controls imposed by the central bank, Sama. In particular, it has ensured that the excesses seen in the real-estate and construction sector elsewhere in the region were not repeated in Saudi Arabia, where banks’ exposure to this market is just 6.5 per cent, compared with close to 35 per cent in Dubai.

Sama’s regulations stipulate that liquid assets, such as government bonds, balances with the central bank and investments, should account for more than 25 per cent of total assets. Its mandatory 85 per cent loan-to-deposit ratio (LDR) limit also played a key role in insulating banks from the worst effects of the downturn.

Testament to the quality of regulation is the fact that Saudi banks today have the highest capital adequacy ratios among their Gulf peers, with an average LDR of 81 per cent.

“Sama has often been criticised by other regulators for demanding high buffer ratios and low rates of leverage,” says John Sfakianakis, chief economist of the local Banque Saudi Fransi. “But this conservatism has clearly paid off.”

Improved liquidity by central banks in the Gulf

In March 2010, Sama governor Muhammed al-Jasser was elected the first chairman of the Gulf Monetary Council, which is tasked with establishing a GCC central bank, to be located in Riyadh.

The council will also prepare the launch of the single currency, which was due to be introduced in 2010 but has been delayed following the withdrawal of Oman and the UAE.

There has been noticeably very little collaboration among Gulf central banks in their approach to the crisis; instead they have preferred to act in a unilateral capacity.

But all central banks are to be credited with improving the liquidity of their respective sectors; GCC banks are well capitalised by international standards. The average capital adequacy ratio for UAE banks stood at 20.3 per cent at the end of March 2010, up from 13 per cent at the end of 2008.

This will ensure they have a healthy cushion with which to manage the challenges posed by NPLs and the pressure these place on profitability and asset quality.

It also means they are well positioned to implement the new Basel III regulations that require banks to more than triple their Tier 1 or “high-quality” capital ratios to 7 per cent by 2019.