Central Bank keeps tabs on lending

The Central Bank is monitoring lending activity by all banks operating in the UAE to prevent a fresh bad debt crisis that could be caused by a surge in mortgage and other personal loans.

Although the country’s 23 national banks and 28 foreign units are lavishing funds in personal and mortgage loans to take advantage of a surge in domestic demand, a repetition of the damaging bad and doubtful debt that jolted the banking sector in the mid-1980s is unlikely because of Central Bank’s tight policy.

“The situation is different now. During the 1980s, the official lending policy was lax and there were no ceiling for credits,” said Firas Al Madi, sales and marketing manager for Northern Emirates – retail banking group – at the government-controlled National Bank of Abu Dhabi (NBAD).

“I know there has been a surge in lending activity recently, including mortgage loans. However, there are strict rules for lending because the Central Bank has set a ceiling for all types of loans. I can tell you that the Central Bank is monitoring the situation and we in the banks are doing the same… so, the emergence of a new bad debt problem similar to that in mid-1980s is totally out of question.”

Speaking to Emirates Business at Cityscape Abu Dhabi, Al Madi said banks in the UAE had largely boosted their reserves in line with Central Bank instructions, while many of them have set up special units for all types of lending, including mortgage, personal loans, consumer loans, commercial credits, car financing and other facilities.

“Banks are largely benefiting from the surge in credits but there are certain limits and ceilings set by the Central Bank. I can tell you despite the large increase in personal loans, most banks are lending responsibly in accordance with their financial capacity and available reserves,” he said. Central Bank sources acknowledged there has been an upsurge in domestic credits by UAE banks over the past two years but added that this is normal given the sharp growth in the economy and local projects.

“The Central Bank is in full control of the lending activity by banks although we do not interfere in their daily operations,” a Central Bank source said. “We have certain rules on lending for their security and safety and we expect them to abide by them. Actually all banks are complying with these rules whether concerning the loan ceiling or size of reserves.”

According to the Central Bank’s latest bulletin, the combined capital and reserves of the country’s 51 banks shot up by nearly Dh45 billion from Dh96bn at the end of 2006 to an all time high of Dh141.1bn at the end of last March.

The Central Bank believes the large reserve base would consolidate the banking sector’s financial position and immunise it against a new bank crisis. Low reserves and the absence of strict lending rules threw the UAE banking sector into its worst crisis in mid-1980s after many debtors failed to pay back to the banks because of a sharp business downturn that followed the oil boom.

The crisis, which was triggered by a rush to extend loans by banks during the oil boom, inflicted heavy losses on most of them and forced some to merge. It also prompted the Central Bank to tighten its control over the banking sector.

Central Bank figures showed strong domestic demand and a sharp upturn in real estate projects boosted banks’ mortgage loans to a record Dh58.8bn at the end of 2007, up by nearly Dh19bn from the end of 2006.

Personal consumer loans also soared to a record Dh48.4 billion at the end of March this year while personal commercial loans swelled by nearly Dh23bn to reach Dh110bn at the end of 2007 from Dh87bn at the end of 2006.

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