UAE banks far more solid than US, UK

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New figures from the UAE central bank show that total credits grew by 36 per cent in the first nine months of 2008 to a record $209 billion. But not more than 30 per cent of this total was for real estate mortgages and the construction sector.

This tends to suggest that wilder predictions that the banking sector faces a UK or US style collapse in the face of potential bad debts are very wide of the mark. In fact, of the $13.5 billion emergency facility opened to the local banks last autumn to meet the financial crisis only $2.7 billion has been taken up.

Relative performance

Compare that to the UK and US banks which have already largely used up the huge sums made available to them at that time. Citi alone has been bailed out for $307 billion and effectively nationalized.

Banks in the UAE have cut back on lending and have suffered a severe liquidity squeeze due to the record volume of loan commitments in the first nine months of last year. But the impact on the banks of the recent downturn is far more of a typical business cycle than the kind of global financial meltdown seen in the major economies.

Bad loans

That is not to say that problem loans will not emerge in the UAE. They certainly will after such a sudden change in the business climate. But the degree of exposure will vary between banks, and the change in the UAE banking structure is not likely to be as dramatic as in the US or UK.

Indeed, if the precedent of the Amlak and Tamweel merger is followed then the UAE may end up with stronger local financial institutions as a result of this episode.

That will not be much compensation to bankers losing their jobs in the downturn but it should put the economy in a better place for recovery when the oil price picks up again. It also means that UAE banks stocks are going to be an excellent buy.