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28 November 2023

Banks' CDs buying at 3-year high

Combined loans extended by UAE banks grew by around 1.3% through 2010 (FILE)

By Nadim Kawach

UAE banks are stepping up a drive to boost investment in low-risk central bank certificates of deposits (CDs) to offset slow domestic credit, with their balance in such tools soaring a three-year high of Dh94 billion at the end of 2010.

Official data showed the CD value gained around Dh1.5bn in December to push up the total CD investment by the country’s 51 banks by around 31.6 per cent through 2010 from nearly Dh65bn at the end of 2009.

The figures by the central bank showed the CD value at the end of 2010 was the highest since the end of 2007, when it hit an all time high of around Dh173.5bn as the central bank sought to mop up excess liquidity.

The value plummeted by nearly Dh126bn at the end of 2008 as banks were forced to withdraw their funds to shore up severe liquidity shortages caused by the global fiscal crisis that erupted in September that year.

CDs rebounded to nearly Dh71.4bn at the end of 2009 and continued their steady growth to reach Dh94.002bn at the end of 2010 as risk-averse UAE banks kept the lid on their lending coffers because of the 2008 crisis and exposure by many of them to regional debt defaults.

Central bank data showed the 23 national banks and 28 foreign institutions remained tight in their credit activity because of these crises and the fact that many major local companies are still reluctant to borrow heavily.

The figures showed the combined loans extended by the UAE banks grew by only around 1.3 per cent through 2010, down from 2.4 per cent in 2009. This compares with more than 30 per cent during 2007-2008.

In December, loans and advances dropped by around Dh7bn to Dh1,013bn after rising by about Dh2.3bn through November.

The decline in credit depress the banks’ combined assets to Dh1,605.6bn at the end of 2010 from Dh1,632.8bn at the end of November to record their first fall since April 2009, according to the central bank.

The surge in CD value in December came after the central bank said it had issued Dh3.5bn worth of Islamic CDs for Shariah-compliant banks in the UAE within plans to create new secure investment instruments and keep those banks away from the foreign markets.

Yield on those CDs is almost equivalent to conventional CDs issued by the central bank to non-Islamic banks in the UAE, according to Hadef Al Shamsi, executive director of the central bank’s treasury department.

"The value of Islamic CDs issued by the central bank to Islamic banks in the country has reached Dh3.5bn,” he said early this year.

“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.”

Financial analysts said banks in the UAE, which control the largest assets in the Arab World, now have a strong demand for central bank’s CD instruments to avert risks in other investments, including credit to the private sector.

“This is an indication that banks have much liquidity and this is reflected in the surge in deposits….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,” said Ziad Dabbas, financial analyst at the government-controlled National Bank of Abu Dhabi.

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 Dh231bn at the end of 2007, the deposits tumbled to nearly Dh99bn at the end of 2008 before climbing back to Dh137bn at the end of 2009.They edged up to Dh140bn in August then slipped to Dh135bn in September,  according to the Central Bank.