Revised regulations on lending caps for UAE banks could help develop the country’s nascent debt capital markets, says the US-based ratings agency Standard & Poor’s (S&P).

The UAE government has given domestic banks five years to comply with stricter credit limits that cap banks’ lending activities, according to a circular distributed last November. The regulations were introduced to prevent the financial difficulties the banking sector and highly indebted UAE-based corporates faced in 2009 from happening again.

Lending caps could encourage a shift from traditional lending to increased activity in the bond and sukuk (Islamic bond) market, says a new report from S&P. This is due to bank investments in marketable bonds and sukuk rated AA- and above by the three major global rating agencies being exempt from the new regulations.  

“This will create an incentive for banks to issue bonds and sukuk, rather than traditional lending,” according to S&P.

The report gives the example of the AA-rated Abu Dhabi-based firm Mubadala Group. A local bank would face a cap on the amount it can lend to this company under the new rules, whereas if a bank buys a bond or sukuk from the company, the exposure would be exempt.

Subject to certain requirements, lending to some government-related entities rated BBB- or above is also exempt from the caps. S&P says this exemption is expected to encourage other non-rated government entities to take the necessary measures to secure a credit rating, such as the publication of audited financials.

Lending caps could also lead to domestic banks increasing their lending to other sectors such as retail and small-to-mid-sized companies to compensate for the reduced lending appetite for government-related entities.