Bank lending dips in the UAE as deposits close the gap

Lending dipped during December, but an influx of new liquidity helped narrow the gap between loans and deposits across the UAE's banking sector.

Bank lending dipped in December as deposits returned to the UAE banking system, narrowing the gap between loans and deposits across the sector.

Lending decreased by 0.3 per cent during December to Dh1.07 trillion, a four-month low for bank lending, according to the latest data from the Central Bank.

Total levels of credit extended during 2011 were 3.8 per cent higher than at the end of the previous year.

However, a surge of new liquidity took levels of deposits in the banking system to their highest levels since August.

Deposits rose 1.5 per cent from a month earlier to Dh1.069 trillion, representing an increase of 1.9 per cent from the same period a year earlier.

Bank lending has outstripped deposits in recent months, leaving banks positioned with slightly too little capital from deposits to cover their lending books. Banks' overextended positions contributed to their woes after troubles emerged at Dubai World and significant numbers of loans had to be restructured.

Banking sector liquidity received a massive boost during the Arab Spring as bank customers in the Middle East moved deposits out of countries experiencing revolutions and a spike in oil prices flooded the coffers of Gulf states with cash.

However, after peaking in April this trend went into reverse as Indian expatriates sent money home, taking advantage of the weakness in the rupee, while European banks pulled deposits out of the UAE banking system structured to benefit from relatively higher interest rates in the Emirates.

The fall in lending comes as signals of business confidence slowed in the UAE.

The HSBC Purchasing Managers' Index for the UAE slipped to 52 in February, from 52.4 a month earlier. A reading of above 50 indicates expansion, while a figure below 50 signals contraction.

"With problems still lingering in the banking sector, credit conditions are likely to remain tight," analysts from Capital Economics wrote in a research report yesterday.