A top commercial banker in the UAE has urged the central bank to cut some of its reserve requirements sharply in order to spur corporate lending.
"What we are asking for now is to provide greater liquidity and release reserve funds...which the banks can use," Abdul Aziz Al Ghurair, Chief Executive of Mashreq bank, was quoted by Monday's Al Bayan newspaper as saying. Mashreq confirmed his comments to Reuters.
Ghurair suggested cash reserve requirements imposed by the central bank on banks' current accounts be slashed to just 1 per cent from 14 per cent to free more funds for lending. Reserve requirements for time deposits are already at that level.
The banker, who also chairs the Emirates Banks Association and the Dubai International Financial Centre Authority, the governing body of Dubai's offshore financial district, said this would provide the banking sector with additional liquidity of up to Dh20 billion ($5.5 billion).
Analysts said the central bank was unlikely to agree to any cut in reserve requirements for the foreseeable future, particularly since the existing amount of funds in the banking system seemed ample. Ghurair himself said there were Dh268 billion worth of liquidity looking for lending opportunities in the UAE at the end of 2011.
"Right now, the liquidity in the banking sector is better than it used to be. So I would not expect them to change the reserve requirement at this particular time," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.
"They did not do it at the height of the crisis in the last quarter of 2008 and the first quarter of 2009."
In late March, central bank governor Sultan Nasser al-Suweidi, asked by reporters about the possibility of shifts in monetary policy, said current policy was good and that he was happy with growth in bank lending.
"Bank lending is going at a reasonable rate...under the circumstances," he said.
Banks' provisions against bad loans rose to a record high of Dh59.1 billion in March, up 27 per cent from a year ago, and the International Monetary Fund has predicted the asset quality of UAE banks will deteriorate in 2012.
In response to such risks, the central bank has introduced new caps on loans to local governments and their entities, and Al Suweidi has called on banks to manage real estate-related risks better. So any policy that might encourage indiscriminate lending appears unlikely.
However, bank lending growth in the UAE, the second largest Arab economy, has stayed in the low single digits since 2009 corporate debt crisis, even though the real economy has recovered smartly since then. Lending growth was just 2.5 per cent year-on-year in March, a three-month high.
Disappointment with the extended period of sluggish loan expansion, which is constraining many banks' profit growth, may have prompted Al Ghurair's comments. Mashreq's net profit increased just 2 per cent from a year earlier to Dh271 million in the first quarter of this year.
Although the three-month UAE interbank offered rate , which banks use to borrow money from each other, is historically low at 1.53 per cent - well below levels above 2.0 per cent in early 2011 - it is more expensive than rates faced by some Gulf banks in nearby economies. The three-month Saudi Arabian rate is at 0.93 per cent.
And despite the overall looseness of the UAE's money market, individual banks have to pay significantly different rates to secure funds; those paying the most might benefit from a cut in reserve requirements. Mashreq quoted a 2.07 per cent rate for three-month money on Tuesday, compared to rates below 1.5 per cent for some other UAE banks.