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01 October 2023

UAE banks pump funds into CDs

Banks' investments in CDs have climbed to Dh92.8 billion - highest in two years (FILE)

By Nadim Kawach

UAE banks are turning heavily to the Central Bank to invest excess liquidity and offset a sharp slowdown in their credit to the private sector which they now see as a high-risk field, financial analysts said on Tuesday.

At the end of November, their investment in the Central Bank’s certificates of deposits climbed to their highest level of around Dh92.8 billion in nearly two years, indicating the banks are awash with liquidity but are reluctant to reopen their lending purses to the private sector, they said.

The trend is a reversal of a policy that followed the eruption of the 2008 global fiscal crisis, when the country’s 23 national banks and 28 foreign units withdrew massive funds from the Central Bank to cushion a severe liquidity shortage.

From a record high of around Dh173.5 billion at the end of 2007, the banks’ investments in the CDs dived to only Dh47.1 billion at the end of 2008 before they started to recover through 2009 with the improvement in their liquidity. At the end of 2009, they rebounded to Dh71.4 billion.

The CD investments fluctuated through 2010 but remained far higher than at the end of 2008 before they peaked at a two-year high at the end of November.

“Banks now prefer to invest in the Central Bank’s CDs because of the risks surrounding their credit to the private sector…there is a sort of a rush by banks to put their funds in CDs despite the present low interest rates…the good thing in these CDs is that they can be converted into liquidity quickly,” said Ziad Dabbas, financial analyst at the government-controlled National Bank of Abu Dhabi.

“This is an indication that the banks have high liquidity and this is reflected in the surge in deposits with them….it is clear that banks just do not want to put their money in high risk sectors…many of them are already suffering from bad debt and are currently worried about the possible failure of some local sectors such as the real estate as well as the foggy picture of the global economy.”

The surge in CD value also followed a decision by the Central Bank to issue Islamic CDs worth Dh3.5 billion.

In statements last week, officials said the Central Bank had issued the Shariah-compliant CDs to Islamic and conventional banks within plans to create new investment tools and keep those banks away from the foreign markets.

“These CDs are open to all banks operating in the UAE, including conventional and Islamic banks…as for Islamic banks, they will be able to improve management of their liquidity and I think these CDs constitute a major step towards the development of Islamic banking in the UAE,” said Hadef Al Shamsi, executive director of the central bank’s treasury department.

Besides CDs, the UAE banks’ deposits with the Central Bank have also largely recovered over the past few months following a post-crisis plunge.

From a record Dh231 billion at the end of 2007, the deposits tumbled to nearly Dh99 billion at the end of 2008 before climbing back to Dh137 billion at the end of 2009. They edged up to Dh140 billion in August then slipped to Dh135 billion in September, according to the Central Bank.

Its figures showed deposits with the country’s banks shot up by around Dh40 billion in October to a record Dh1,053 billion before slipping to Dh1,049 billion at the end of November. But they remained above loans after they were outstripped for nearly two years because of slow deposit growth and high domestic credit during the boom years that preceded the global crisis.

Central Bank figures showed domestic credit grew by only around 2.2 per cent during the first 11 months of 2010 to extend a slow lending trend through 2009 following a surge of about 35 per cent during 2007 and 2008.

Dabbas said he did not expect a rebound in domestic credit in 2011 on the grounds many banks are still heavily exposed to bad debt and to real estate.

“This will also depend on the policy of each bank…..but I don’t think there will be a full resumption of lending activity…another factor is that the private sector itself is still not very enthusiastic about borrowing in the present conditions…unless we see a major turnaround in domestic and global business conditions, the appetite of the private sector will remain weak.”