UAE banks will face tough trading conditions in 2012, as they feel the pinch of this year’s caps on retail lending, the CEO of Al Hilal Bank has said.
Financial institutions across the emirates will see a surge in non-performing loans and find fewer opportunities for growth while finance to real estate and retail customers remains subdued, Mohamed Berro said.
“Next year provides a very challenging situation… for the banking sector,” he told Arabian Business.
“From a credit and risk management perspective I think [the retail lending caps] are a very valid set of regulations, which have been put in place to manage the excessive lending that was happening. I think [in the] long term we will start seeing the benefits of that, but in the short term we will see a negative impact.
“One [thing] is the actual growth of that sector, [which] has now been stopped. The other is that we will [see] an increase in non-performing loans.”
The controversial restrictions on loans to retail customers were rolled out by the UAE Central Bank in May this year in a bid to curb the excessive lending and high rates of consumer debt seen in 2007 and 2008.
The regulations capped personal loans at 20 times a borrower’s monthly salary, and limited maximum repayment periods to 48 months.
Monthly installments for all loans, including personal, car, housing loans and credit cards, are not to exceed 50 percent of a customer’s gross salary and any regular income, the central bank said.
Lending has since slowed to a trickle across the UAE and particularly in Dubai, which continues to feel the effects of the financial crisis.
Marred by a 60 percent fall in real estate value in the wake of the recession, lending to developers and property investors in the emirate has also fallen sharply.
In May, private sector credit growth was flat year-on-year, compared with rates of over 50 percent in 2008.
Berro said he see no signs of this abating in the near future.
“[The real estate sector]… is still facing difficulty. This is not a good formula for lending.
“The corporate sector is may be the only one [offering opportunities for growth] but still there are issues within that sector. There is lack of transparency among [small and medium] businesses, so therefore as banks, we are taking a very big risk with that sector.
“The other issue is that a lot of these small businesses are start ups, [and] start ups also provide high risk for the banks.”
The number of loans to SMEs had started to increase as banks sought to overcome the limitations on retail lending, he added, but further action was required to provide risk protection to lenders.
“I think the formula for success is for the government and the banks to work together. The banks provide liquidity, the government provides risk protection. They [should] guarantee or partly guarantee these loans, [and] subsidise interest.
“This will mitigate the concerns and the risks that the banks are worried about.”
Al Hilal Bank, which was set up in June 2008, will continue to look growth in 2012.
The government-owned entity, which has 19 branches across the UAE and three in Kazakhstan, we will be adding three more branches this year; one in Dubai and two in Abu Dhabi.
It will also be focusing on Islamic products, which are becoming increasingly popular in the region, Berro said.
“Markets are looking for Islamic products. They believe it is asset-backed, ethical [and] less risky,” he said.
“We will be issuing our first sukuk early next year. There were some concerns with what’s been happening in Europe and after the summer [as to] how this would affect sukuk issuance, but I do not think the sukuk will be affected.
“Sukuk is needed in this part of the world, so I think we will see at least a small increase in Islamic sukuk issuance in the next year.”