UAE credit growth hits highest level since financial crisis

24 September 2013

Bank lending picking up due to improved liquidity conditions

Credit growth in the UAE has hit its highest level since the financial crisis, as banks enjoy a period of high liquidity levels and relatively strong economic growth.

Credit growth for the year to July 2013 was 6.4 per cent, according to the latest data from the Central Bank of the UAE. It had been rising fairly steadily each month for most of the past year, but is still a long way off from the peak rates of almost 60 per cent in early 2009.

UAE year-on-year credit growth

Rising credit growth is good news for the country’s economy, as it is indicative of increased investment. During 2010, as lenders responded to a recession in Dubai and slower growth across the UAE, credit growth slumped to less than 1.5 per cent. Banks were reluctant to agree to new loans because of fears about how bad the economy would fare and defaults across a range of corporates in the country.

The turnaround in Dubai, coupled with signs that government spending in Abu Dhabi is picking up and a broad increase in private sector activity, have all helped to stimulate bank lending.

While growing loan books are a good sign for the financial sector, executives in the industry complain that competition to book new assets is leading to falling margins. They also worry that much of the major corporate activity is refinancing existing debt, rather than new loans to fund investments or expansion.

“The good news is there is a lot of liquidity in the banks, but this is leading to more competition to lend and we are not yet seeing a return of the larger corporates raising new money,” says the head of one bank in the UAE. “At the moment it is all just refinancings. That will start to put pressure on the overall profitability of the lenders if the volume of deals does not increase.”

The loan-to-deposit ratio across the UAE banking sector at the end of July was 92.6 per cent, and has risen for the previous three months. It is still much lower than its peak in early 2010, when it crossed 105 per cent. It also gives lenders plenty of room to continue booking new deals as central bank guidance allows the loan-to-deposit ratio to rise to about 100 per cent.

However, a series of new regulations from the central bank could temper credit growth. New initiatives by the UAE bank will put limits on lending to the government and government-owned companies and place restrictions on mortgage lending. The introduction of a credit bureau is also expected to make banks much more cautious about booking new loans to retail customers.

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