Banks should study risks carefully: Suwaidi

The Central Bank is "not encouraging" banks to give loans without "studying carefully the risks and adding the extra cost of risk to the loan package", said Governor Sultan bin Nasser Al Suwaidi.

Stating this in an interview with the Oxford Business Group, a part of which has been shared with Emirates Business, the governor added: "Of course, that will naturally depress the process of giving loans. Expansion of credit is controlled, not directly controlled, but regulatory controls are there nevertheless. I think these are the most important pillars… the other pillar is to provide liquidity to the banking system through the UAE Central Bank."

Suwaidi said that with the bulk of their business firmly entrenched in retail banking, the UAE's financial institutions are continuing to show signs of "relatively high lending activity", dispelling concerns that they could become risk averse in the current economic climate.

He said the Central Bank would push ahead with what he described as its two-pronged approach of ensuring that the banking system had sufficient liquidity, while exercising indirect control on credit expansion.

"Institutions must look at risks carefully with regard to lending, but I am not overly concerned on this front, because banks in the UAE are mainly retail commercial banks. This means the system benefits from the inherent strength of business banking, while also having the advantages associated with retail. Against this backdrop, UAE banks are very solid with high liquidity and a Central Bank which is supportive," he said.

Over the past year, the Central Bank has cut interest rates several times to bring them down to one of their lowest levels to make money for banks, less costly and to encourage them to lend as part of its expansionary monetary measures.

Other Gulf oil producers have followed suit since the global financial crisis reversed nearly seven years of an oil boom that involved a series of rate hikes to discourage banks from lending and to curb inflation.

Despite the plunge in rates to just one per cent, banks in the UAE and neighbouring Gulf countries are still tightening their credit lines because of the crisis and recent debt defaults by two key Saudi Arabian family firms.

Central Bank figures showed total credit by the 52 banks grew by only around 2.7 per cent to Dh1,022 billion at the end of March 2010 from Dh955bn at the end of March 2009. Through last year, credit grew by about 2.4 per cent, which was a fraction of the credit growth of 47.6 per cent recorded in 2008.

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