The five largest banks in Abu Dhabi are expected to ease lending restrictions to investors starting this week, according to senior executives and financial analysts.
They said this has come about as a direct result of the Abu Dhabi Government's decision to pump Dh16 billion into the National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank, First Gulf Bank, Abu Dhabi Islamic Bank and Union National Bank.
However, the rate of interest on loans is not expected to return anytime soon to levels prevailing before the global financial crisis broke.
Speaking to Emirates Business, Abdullah Saleh, NBAD's General Manager, Operations, said: "Liquidity in Abu Dhabi banks will largely improve, following the government's decision to pump in Dh16bn. And despite the fact that the money was meant to support the five banks' capital, the banks will give loans to investors more freely than before, and Abu Dhabi's economic life will go back to normal."
Saleh said the liquidity problem will not fully be over but the new funds will enable banks to actively contribute in financing both new and pending projects, especially big ones. Each bank will use the funds in accordance with its credit policy.
He said banks should steer the funds towards financing projects that would serve the emirate's economy, since improper use of funds will lead to the return of liquidity shortage in banks.
Speaking about the rate of interest, he said they would not go down quickly to their earlier levels, and if a drop in the interest rates happened, "it would be slow and its rate will be basically depend on supply and demand".
Agreeing with him was Dr Humam Al Shamma, economic advisor to Al Fajr Securities, who said the rate of interest on deposits or loans, would not return to previous levels. "This is impossible at the moment because banks are now paying higher interest rates to depositors at 3.5 per cent to seven per cent. Therefore banks will not be able to lend at lower rates, since the liquidity problems still exists."
Al Shamma also said the funds pumped into the banks would not have any quick impact on liquidity in the Abu Dhabi market. "They are not funds for disbursement as loans, but will enter into the banks' capital. And most often, banks lend on the back of funds they do not own, which are only represented in deposits. Capital is the last haven banks resort to in extreme cases."
Dr Ashraf Dawaba, professor of economics at Sharjah University, said the Abu Dhabi Government and the Central Bank should closely monitor the banks that have received the Dh16bn to make sure the funds are utilised properly. The fear is that the banks will misuse the funds in loans to big speculators in the Abu Dhabi stock exchange, he said.
Dawaba added that the funds should be steered towards financing projects that are necessary for the emirate at the moment, since Abu Dhabi has vast ongoing projects estimated at some Dh1.6 trillion. And there should be priorities for these projects.
"The main reason for the global financial crisis was the absence of monitoring.
"And generally speaking, banks do not like monitoring of their work. The Central Bank has detailed information on the liquidity situation in each bank, reasons for the liquidity shortage and the banks that are suffering the most. What is important is to rationalise the behaviour of banks and to direct them towards serving the needs of construction and development in the country," Dawaba said.