Chorus for strong bond market in UAE grows

The UAE's banking sector is projected to see an improvement in 2010, with bigger budgets and higher profits at banks compared to 2009, said banking and financial analysts in Abu Dhabi yesterday.

Speaking on the second and final day of the Abu Dhabi Economic Forum, the experts attributed this mainly to banks having set aside large sums in 2009 as allocations for contingencies.

They also underlined the necessity to establish a strong bond market in the country and said the UAE economy needed this market to enhance investor confidence in the light of troubled stock and property markets.

Abhijit Choudhury, Senior General Manager and Chief Risk Officer at National Bank of Abu Dhabi, said: "The year 2009 was the worst as the banks took strict precautionary measures. The majority of banks increased their allocations for 2009 to prepare for any problems, while some banks set aside very normal allocations that may not be needed. Obviously, the banks will not be in need of all these allocations in 2010 and, consequently, their profits will rise and their budgets will improve. The allocations of 2009 totalled Dh43 billion, which accounts for four per cent of profits. The banks definitely will not need such huge allocations in the current year."

Choudhury underlined the importance of re-structuring bank loans, which stand at Dh1 trillion.

He said these loans might cause problems to the banking sector in future, especially as Dh200bn out of the total were allocated to the real estate sector.

Mohammed Ali Yasin, CEO of Shuaa Securities, said: "It is necessary to introduce at least a three-year schedule for banks to reduce their loans.

"These loans have accumulated for over 20 years and the problems they have caused will not be resolved within a year or two.

"The banking sector's recovery has actually started, but is progressing slowly at present. The sector is expected to recover remarkably in the second half of the current year. However, 2010 continues to show signs of being a difficult year and the situation will improve only in 2011."

Dr Obaid Al Zaabi, Research Advisor at Securities and Commodities Authority (SCA), said: "The SCA has issued a system of bonds and sukuks but demand from companies is still limited. There are two reasons behind the absence of an active bond market in the UAE. The first is the absence of a mechanism for the facilitation or motivation of liquidity. The second reason is the non-availability of mechanisms to avoid risks related to bonds.

"However, we have to go through these difficulties and offer bonds for the medium and short terms, not long terms, as investors do not prefer long-term bonds. I think the bonds will prove beneficial for the UAE economy."

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.

Follow Emirates 24|7 on Google News.