UAE banks have built up sufficient reserves and boosted their capital base after the 2008 global financial distress and this will enable them to withstand a fresh crisis in the future, the central bank chairman has said.
Khalil Foulathi said stress tests conducted by the International Monetary Fund on the UAE’s 23 national banks and 28 foreign units showed they are highly capitalized and in a “good health.”
His figures showed UAE banks’ Tier 1 capital adequacy far exceeds the global requirement of eight per cent as it stands at 12 per cent. He said some banks in the second largest Arab economy are even capitalized at as high as 20 per cent.
“If there were to be any shocks in the coming years, which would obviously result in provisions being needed, then our financial institutions are in a solid position,” he told Oxford Business Group (OBG) in an interview as part of its Abu Dhabi’s annual country report.
“That is not to say that banks have completely forgotten about the global financial crisis. As is the case around the world, when financial institutions go through a rough period it takes them time to regain their confidence for lending.
Presently this cautious mode, which as I say is a global phenomenon, has resulted in some banks becoming more reticent in their lending approach.”
Foulathi said another factor is that banks see the new Basel III requirements on the horizon so they are keeping more liquidity, “which is sensible.”
“The salient point remains that deposit growth is healthy and loan growth, though slow, is not in contraction mode. Banks may be strengthening their balance sheets and holding liquidity, but they are still lending to the right projects.”
Foulathi said the Central Bank is exercising what he described as a degree of moral persuasion to the banks to extend credit and end their lending tightness. “We believe this is particularly important when talking about small and medium-sized enterprises (SMEs)…….indeed, when the government provided the support facility for the banks, the Tier 2 capital, there were conditions included encouraging banks to extend credit to SMEs,” he said.
“Of course, the government has also recognized that there is more room for it to increase its own support for entrepreneurs through the Khalifa Fund for Enterprise Development….after all, looking at successful economies around the world one sees that SMEs are a cornerstone to economic growth and employment opportunities….this is an important point and one that has not been lost on either the government of the UAE or its banking sector.”
Asked about Islamic banking, Foulathi said the Central Bank would continue to allow conventional banks to offer Islamic financial services.
“It is our belief that this provides added competition to the overall sector, which helps improve customer service, products and innovation within the industry,” he said. ”As long as these banks can prove that their Islamic windows are Sharia compliant and that qualified Islamic scholars are on their boards, then it is good for the sector.”