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country report
UAE
UAE: Strategic shifts or is there more
to come?
By Moinuddin Malim
The year in the passing has seen a rationalization of projects,
a continuation of restructuring of financial transaction,
consolidation efforts and going back to basics of prudential
banking.
UAE banks are in a healthy and strong position with many
positive financial indicators that reflect their good performance
and clients’ confidence in spite of the political chaos in the region
which badly affected the economies of many countries.
“The banking and financial institutions are insulated from the
current turmoil in financial markets and political chaos in the
region,” said the UAE central bank in a statement following its
board’s seventh meeting for the year 2012 in Abu Dhabi. Banks
in the UAE are well capitalized and profitable and their balance
sheets have been strengthened recently due to the strong
economic performance and high government participation in
financial institutions.
2012: A review
Being one of the key oil producing nations, the UAE has ramped
up oil production as it aims to meet its target of producing 3
million barrels/day by the end of 2012. Dubai’s focused approach
on non-oil foreign trade, re-export, tourism, travel, retail and other
services made it bounce back quickly. On the other hand, Abu
Dhabi continued its efforts to attract tourism from neighboring
countries.
As a result of improvements in the institutional framework and
macroeconomic stability, UAE was able to move up three places
to rank 24 th in the 2012 Global Competitiveness Report produced
by the World Economic Forum.
The banking industry in general had a slow growth this year.
The central bank proactively started to push prudential lending
policies both at retail as well as wholesale levels. A retail lending
cap was introduced to lower retail clients’ leverage that also
narrowed banks’ spreads and brought the retail lending growth
at 2-3% year-on-year in 2012. The decision to bail out local
retail borrowers by the president showed the desire to maintain
stability in the country. On the other hand, the ratio of the banks’
provisions to their bad, classified or suspected loans grew by
18.3% during the first three quarters of 2012 as compared to last
year, while the total loans given by these banks grew by no more
than 3%.
was priced at an expected profit rate of 6.375%, which is one
of the lowest rates achieved for any perpetual instrument by a
global bank.
2013: A preview
Despite regional economic and political issues, the federation will
remain stable next year. The federal government will continue
to pursue an expansionary fiscal policy, supported by high oil
prices. The fiscal surplus is expected to rise in the second half of
next year as the government reins in spending, averaging 4.8%
of GDP in 2013-17. UAE growth forecast for 2013 could be lower
owing to a slower growth forecast in emerging-market economies
in Asia and a slowdown in world trade.
Expenditure at a federal level is projected to increase in 2013,
although the proportion of spending as a percentage of GDP
will decline steadily. The Abu Dhabi government is expected to
maintain an expansionary fiscal policy throughout the forecast
period. The Dubai government, in contrast, while reining in the
spending might start on selective value added projects. Further
restructurings by Dubai GREs may put pressure on the federal
budget; however, it is unknown whether additional support from
Abu Dhabi will be required or forthcoming.
Though the banks may report decent to strong margin
improvement at year end, increased liquidity and corporates’ low
borrowing appetite might pressurize lending spreads in 2013.
The banking sector in the UAE will experience slower but more
sustainable growth due to tough central bank regulations aimed
at controlling excessive lending. The rise in lending duration
is also pushing banks to go for longer period fixed-income
liabilities, which will negatively impact margins for both Islamic
and conventional financiers. The CAGR of Islamic banking
will continue to outpace conventional finance due to a shift in
consumer demand at all levels. 2013 through 2015 will see the
UAE Islamic banking industry looking at all avenues for growth
including geographic expansion. Services standards and price
suppression will drive the industry, while a few institutions will do
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well; others will see steadier and slower growth levels.
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Moinuddin Malim is the CEO of Mashreq Al Islami. He can be
contacted at MoinuddinM@mashreqalislami.com.
The merger/takeover of Dubai Bank by Emirates Islamic Bank
gained momentum this year and while the consolidated bank will
become the third-largest Islamic bank in UAE by size, it should
also address the inherent issues which led to this event.
The year also saw world’s first Shariah compliant hybrid Tier-
1 Sukuk issued by Abu Dhabi Islamic Bank, that was also the
region’s first publically issued perpetual and Tier 1 instrument.
This strategic transaction marks a key milestone for the global
Islamic finance industry and a major and rare innovation by an
Islamic bank. The US$1 billion perpetual non-call six-year issue
52 February 2013