After the breakneck pace of credit growth during 2003-08, the current cautious attitude to lending among the UAE banks should be seen as positive
As expatriates flocked to the country to take advantage of the booming economy, credit was given out to anyone who asked, with scant examination of their ability to repay the debt. Free-flowing credit drove up the cost of property sales and rentals to unsustainable levels and contributed to the formation of the bubble in the UAE economy. The bursting of the bubble was inevitable sooner or later.
The banks were among those that benefited most during the good times. Now, amid the fallout of the financial crisis, they in particular are being impacted by falling asset prices and debt defaults. An increasing percentage of profits are having to be set aside as provisions against loans to customers that, with the benefit of hindsight, banks perhaps would not have been so eager to lend to.
This year and next will be a challenging time for UAE banks as they struggle to maintain profitability levels. It will afford them ample opportunity to reflect on the mistakes of the past – and the dangers of encouraging individuals and corporates to live beyond their means – in pursuit of short-term gains.