October 29, 2012 2:09 pm

UAE bank rules restrict lending levels

New United Arab Emirates central bank rules aimed at cutting lenders’ heavy exposure to state institutions have come into force – but the scale and size of the problem mean it could take years to resolve.

While the directive aims to protect the financial system by reducing local banks’ loans to governments and state-related entities, the latest results from some big banks suggest these credit lines are continuing to expand.

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The domestic financial institutions – many of which are themselves owned by government or ruling family members – are now in talks with the central bank over how to comply with the rule changes.

The directive, which became active last month, is part of a broader effort by the central bank and UAE rulers to tighten up the financial system after perceived excesses of the boom years. In August, Abu Dhabi, home of most of the UAE’s oil riches, quietly issued a tougher policy for debts taken on by government-owned businesses.

The tightened central bank rules on local bank lending are an attempt to curb vast government-related loans racked up before and since the western financial crisis and the knock-on turmoil in Dubai in late 2009. The new regulations cap lenders’ exposure to government institutions at 100 per cent of their capital, with a further restriction that they cannot lend more than 25 per cent of their capital to any one state-related entity.

The pressure this will put on some leading institutions is illustrated by the situation of Emirates NBD, which is controlled by the Dubai government and is reckoned by analysts to have the highest level of sovereign lending of any local bank.

The bank’s exposure to its main shareholder – a liability known as the government of Dubai overdraft – has risen sharply over the past year from 31.5 per cent to 39.15 per cent of overall loans and receivables. The bank lent the government an additional Dh15.5bn ($4.2bn), which analysts say puts its sovereign exposure at 240 per cent of its capital – more than two-and-a-half times the central bank limit, or even higher if the 25 per cent cap is used.

Emirates NBD’s overall loan book only rose about Dh4bn during the same period, showing that government lending is crowding out credit to the private sector, say analysts.

Emirates NBD says it is in discussions with the central bank on how to deal with the sovereign lending directive.

“The lending [to the Dubai government] is mostly quasi-project finance to finance infrastructure projects and facilities in Dubai and normal working capital requirements for some departments,” says Rick Pudner, chief executive. “This is encapsulated in our discussions with the central bank to see how we become compliant with the circular in the future.”

Mr Pudner says the bank – which reported a threefold rise in profits in the third quarter of 2012 compared with the same period in 2012 on lower provisioning for bad loans – is working hard to broaden its base of customers, including a focus on small and medium-sized businesses and Islamic facilities.

The UAE central bank is seeking serious proposals from other lenders detailing how they expect to reduce exposure to government bodies and institutions.

Tirad Mahmoud, chief executive of Abu Dhabi Islamic Bank, says the central bank is “doing the right thing” by introducing the directive. He says the new rules will not be a problem for his bank, but warns some other institutions will be reluctant to let go of what has historically been an easy lending option.

“The difficulty here is that some banks are unwilling to accept that they can’t do more of the same,” he says. “They become addicted to giving money to the same client and they want to keep doing that.”

The central bank no doubt realises that unwinding the sovereign exposure levels at some UAE banks could take years. But it is keen for lenders to start at least to move in the right direction.

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