UAE banking is setting itself higher targets for 1994 and beyond, despite unmistakable signs of a regional slowdown.

High living standards, a strong service sector oriented to markets in the Gulf and beyond, and a powerful oil industry set an upbeat tone for the business environment. On top of this, rising credit demand and the growth of the banking habit is creating new opportunities for the banking community, which includes almost 50 foreign branches.

Yet, banking is still a developing industry. The top four local institutions - National Bank of Dubai, National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank (ADCB) and Emirates Bank International - are either controlled by government or heavily dependent on state business. The private commercial banks are only beginning to approach international standards.

The driving force in the market is a group of powerful foreign institutions that have been using their global presence and well-known franchises to set the standard. The largest local institution by far is the British Bank of the Middle East (BBME), a subsidiary of HSBC Holdings. Dubai is the bank's regional head office as well as an important market in its own right, a fact underlined by the opening in autumn 1993 of its new building on the creek.

Standard Chartered Bank and Citibank compete for second place behind BBME. The US institution enjoyed another year of rapid growth and higher profits and has assets of about $1,000 million. Citibank general manager Ahmad Bin Brek, the first UAE national to head a Citibank operation, says the growth in lending in 1993 was mainly due to short-term trade finance business. He hopes that growth will continue in 1994, a year in which Citibank will extend its range of retail products.

The main preoccupation for the foreign banks was the implementation on 1 January of a new rule restricting the amount of lending to individual customers. From that date, single funded operations can no longer be bigger than the equivalent of 7 per cent of a bank's capital.

Reducing risk

The reason for the new measure, the first prudential ruling introduced in the emirates, is the mounting pressure for banking centres to fall into line with standards defined by the Bank for International Settlements (BIS). In the UAE, the desire to reduce the risk of imprudent banking has been enhanced by the continuing aftermath of the 1991 closure in most international centres of Bank for Credit & Commerce International (BCCI).

The affair exposed how easy it was for a determined group of people to abuse the banking system. The legal battle between the majority shareholders, former BCCI executives, creditors and regulatory agencies is set to continue for the indefinite future.

Bankers complain privately that the 7 per cent rule is over-restrictive and they lobbied successfully for the ratio to be applied to non-balance sheet exposure. They argued for a rise in the minimum capital requirements as a satisfactory substitute. Foreign banks pressed for their global capital capacity to be taken into consideration. Still unhappy about the rule, which is likely to lead to loans to local borrowers being booked outside the emirates, foreign banks accept that it is here to stay.

Buoyant market

Happily, the buoyancy of the market overshadows any lingering unhappiness about the 7 per cent rule. This will be underlined this spring as results reveal that local banks had another record-breaking year in 1993.

MashreqBank, the largest wholly private commercial bank, has set a promising marker with the announcement that its net profits rose by more than 20 per cent in 1993. The bank plans to open a new branch in Abu Dhabi and develop its product range. Analysts expect the bank to be a pacesetter for local institutions in the second half of the 1990s.

MashreqBank is the fifth largest local bank. In the years to the end of the century, the main issue for the four largest local banks is whether they can or should be allowed to develop greater autonomy from government. The issue is particularly challenging for Abu Dhabi, where the government and its agencies control three banks: ADCB, NBAD and Union National Bank, previously the local unit of the BCCI group. For the national banks of the five other emirates, the future is secure, but prospects are limited.

Looking to the future, leading banks are preparing for a wave of national and regional financial reform which must eventually come. The federation is considering the establishment of an official stock market. The banks will be eager to play a leading role in equities as brokers, investors and market-makers.

Long-term thinkers are also looking forward to the time when the GCC implements its plan for a single market for goods and services, a development that implies that Gulf banks would be able to operate anywhere in the six countries. Several of the largest local banks already have significant international operations.

Well-managed and soundly capitalised banks that manage to develop solid managerial and technical capabilities therefore have reason to be cheerful. But for the rest of the market, which has long been viewed as over-banked, merger or oblivion is all the future holds.