8.12 AM Friday, 1 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 05:25 06:38 12:34 15:53 18:24 19:38
01 March 2024

Central Bank to review foreign banks policy

By Parag Deulgaonkar



Foreign banks in the UAE will see more operational freedom to expand and consolidate their businesses in 2008, according to UAE Central Bank governor. “We are reviewing this issue regularly and you will be surprised to see a change in the policy in coming months,” Central Bank Governor Sultan bin Nasser Al Suwaidi said Thursday.


The surprise could well be in terms of allowing foreign banks to expand their branch network from the limited eight to a higher number, allow new foreign entrants, the issue of taxation, classification of banks and foreign investment or takeover of local banks. Branch licences were recently issued to the Samba Banking Group of Saudi Arabia, National Bank of Kuwait and Doha Bank of Qatar, giving all the GCC countries a banking representation in the UAE.


There are 48 banks in the country of which 22 are local. Currently, foreign and national banks are not subject to the same policies regarding taxation. National banks are exempt from taxation on operations within the UAE, while foreign banks are subject to a 20 per cent income tax. 


“We need to see how the Central Bank perceives takeover and investments by foreign banks into local banks,” said Raj Madha, banking analyst at EFG-Hermes.


Madha, who had ruled out relaxation of rules for foreign banks before 2009, said the statement by the UAE Central Bank governor, if confirmed, was “surprisingly definitive”, and that it would perhaps reflect a softening in its stance on issues raised during free trade agreement talks with the United States and the European Union.


“Its good news for us, as we will now be able to open more branches. This will allow us to extend our retail operations and reach to more customers,” Sanjoy Sen, country business manager – UAE, Citibank, told Emirates Business.


A Free Trade Agreement (FTA) with the US is expected to facilitate full operating licences for large US banks in the UAE, but a delay gives local banks time to consolidate, said another analyst. Negotiations between the US and the UAE about signing a Free Trade Agreement will not be resumed until after a new US president is elected, as reported by Emirates Business.


A recent report by the Dubai Chamber of Commerce and Industry said a free trade agreement with the US will result in American investment in the UAE banking industry, with US-based banks strengthening their presence here.


The UAE banking sector, meanwhile, has seen a stellar performance in 2007, as combined profit rose more than 25 per cent to Dh24.8 billion compared with Dh19.4bn in 2006, Suwaidi said on the sidelines of the banker’s lunch.


Total deposits grew by 21.5 per cent to Dh675bn from Dh555bn, asset and liabilities jumped 23 per cent to Dh1.55 trillion from Dh852bn, while loans and advances increased by 21 per cent to Dh630bn from Dh520bn.


“The future is bright for banks operating in the UAE. The economy is expected to grow as demand for oil and gas will continue to be strong for coming years, creating additional opportunities for banks,” he added.


Aggregated banking system net profits have more than trebled between 2003 and 2006, increasing from Dh6.4bn in 2003 to Dh19.7bn in 2006.


The asset quality of the banks has improved significantly over the past few years. The average non-performing loan ratio of rated banks decreased from 8.3 per cent in 2002 to 1.7 per cent in 2006, while their provisioning cover rose from 80 per cent to 106 per cent over the same period, according to Moody’s.


Over the past couple of years, banks have been riding the crest of a wave, underpinned by a vibrant economy and strong growth in a benign environment.


High oil prices, escalating government spending on infrastructure, coupled with high private sector involvement in real estate and the positive momentum in the country’s stock and capital markets have created an overwhelming appetite for credit.


“Rapid lending expansion is likely to tighten banks’ liquidity and elevate their credit risk profiles,” Peter Carvalho, vice-president – senior analyst, Moody’s, wrote in the report on the banking sector.


The buoyant economy and confidence-boosting environment will continue to prevail, encouraging banks to embrace growth, albeit with oil and real estate price corrections and geo-political risks looming on the horizon as the unpredictable factors.


Moody’s expects the banks and their profitability to flourish in 2008, but at a slower pace than in 2007, given the progress achieved in their financial metrics, good management and much-improved risk management systems.


Investment bank EFG-Hermes believes the banking sector’s general outlook for the economy in 2008 is rosy. “The sector is expected to see expansion and consolidation, with more domestically focused banks looking towards consolidation and larger banks engaging in expansion across the Mena region,” the Cairo-based bank said.


Meanwhile, the Central Bank will start implementing the federal strategy from January 1 next year, which will create more opportunities for banks in the country, the Central Bank governor said.


The apex bank was part of the ministerial economic development team responsible for introducing measures to create an “enabling environment” for overall economic stability.


“Achieving economic stability will require creating a set of good economical, financial monetary policy decisions. Banks need to be ready and prepared to participate in the strategic programme,” he said.



Reserve ratio to remain intact


The UAE is monitoring the situation, but will not raise the minimum reserve requirements for banks to tackle inflation, Suwaidi said.


Annual average inflation surged to 9.3 per cent in 2006 from 6.3 per cent in 2005. Suwaidi, who has always argued inflation was due to housing shortages and rising rents, refused to comment further, saying: “Inflation is the responsibility of the Ministry of Economy and the special statistics body that is being set up.”


Inflation rate is projected to decline to 7.6 per cent in 2008 and 7.2 per cent in 2009, with rental inflation in Abu Dhabi preventing any significant fall over the short to medium term despite the expectation of moderation in Dubai in 2008 and more so in 2009, according to Cairo-based investment bank EFG Hermes.


A revaluation of the dirham against the dollar or moves to a currency basket will also help limit imported inflation to a degree.


The extent of the decline in inflation, however, will be limited by rental inflation in Abu Dhabi.



Chart your own course


The Central Bank governor is open to allow local banks to explore opportunities across the border. “If you want to explore the great opportunities outside the UAE and cross-border alliances in the GCC, it can be in conformity with the regulations in those countries,” he said.


There has always been the argument that the UAE is over-banked. “The profit growth is testimony to the ample opportunities available here,” he said.


The UAE Central Bank, a federal government entity, was established under Union Law No 10 promulgated in 1980, which is the cornerstone of the regulations governing it and the banks. The extended financial community is an amalgam of the 48 commercial banks (including Islamic banks), 69 representative offices, 102 money-changers, 34 monetary and financial brokers and 11 finance companies.


Islamic banking witnessed the first commercial bank in the UAE and the GCC with the establishment of Dubai Islamic Bank in 1975, followed by Abu Dhabi Islamic Bank. Later, three conventional banks were converted into Islamic banks, namely Sharjah Islamic Bank, Emirates Islamic Bank and Dubai Bank.


Al Noor Islamic Bank, with a capital of $1 billion (Dh3.67bn), was set up in Dubai this year, while Al Hilal Bank, with a similar capital, will be operational in Abu Dhabi next year.