Amlak and Tamweel once controlled more than half of Dubai's booming mortgage market, but for more than a year the country's two largest Islamic lenders have been closed to new customers while they crept toward a merger.
Now the creation of a judicial panel to hear disputes involving the two lenders and their creditors is expected to clear the way for the tie-up. But the new panel's precise legal remit has not been made public and lawyers fear it may be usurping a function better provided by the country's court system. "In my opinion, the judicial committee is more of a pre-emptive move to help keep the situation under control, should some of the creditors choose to push for their claims," says Khalid Howladar, the senior credit officer of structured and Islamic finance at Moody's Investors Service.
"It's there to provide an organised forum for workouts rather than going straight to the courts. It is likely a proactive move to help lessen possible stress among the creditors." The Ministry of Finance said in November 2008 that the lenders would be part of a four-way merger. The shares of Tamweel and Amlak had each fallen by more than 80 per cent in the previous 11 months. Both shares were suspended from trading on the Dubai Financial Market at the same time.
Last October, a state panel recommended merging the two lenders this year and that process is to begin this quarter. The new judicial committee is being seen as a way of containing any legal fallout from disputes that may arise between the lenders and others, including creditor banks, mortgage holders and developers. The committee, created by a royal decree, will be the final authority on all legal claims. But the Government has not yet published the mandate of the panel, which comprises three judges from Dubai Courts.
The office of Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, issued the decree last month. Analysts say one reason for establishing the panel could be to avoid a further crisis of confidence among investors after Dubai World's debt-restructuring effort. The conglomerate is seeking a standstill agreement covering US$22 billion (Dh80.8bn) it owes to more than 90 lenders. In December, the Dubai Government formed a tribunal, the first of its kind in the emirate, to streamline the process of settling financial disputes between the creditors and Dubai World's subsidiaries such as Nakheel and Limitless.
In establishing both committees, the Dubai Government seeks to avoid a potentially lengthy court process while allowing the firms to move forward and maintain their functionality, says Essam al Tamimi, a senior partner at the Dubai legal firm Al Tamimi and Co. "In the normal judicial system, courts will look at what is presented to them and make a judgement, which could be appealed in a higher judiciary, turning into long legal battles," Mr al Tamimi says. "But in this instance, judges will be fully aware of the complete picture."
Tamweel and Amlak relied on short-term loans from local lenders to expand their share of the mortgage market. Their aggressive plans, extending as much as 90 per cent of finance for off-plan properties during the six-year property boom, helped both firms become quickly established in the mortgage market. Neither of them has a banking licence, which prevents them from accepting customer deposits, one of the cheapest ways of obtaining funding for mortgages.
After hitting a peak in the middle of 2008, property prices have fallen by as much as 50 per cent in Dubai, where both the lenders had amassed a major part of their mortgage portfolios. The property slump has left them with an increasing number of mortgage defaults and, in some cases, property developments that have yet to be built. Analysts believe the new panel will hear disputes arising from financing for off-plan properties.
Tamweel owes developers Dh2.7bn for properties that have not yet been completed, Fitch Ratings says. This accounts for half of the mortgages extended by Tamweel, which is considered "inherently riskier", Fitch says. Most of the home loans made by the pair went to customers buying properties from major Dubai developers such as Emaar and Nakheel. The consolidation of property developments in the emirate could have damaging consequences for both lenders, analysts say.
"There is a risk that a property developer could suffer difficulties and cancel a project, leaving Tamweel with the title to an unbuilt property," says Fitch. Tamweel also owes its major shareholders Dh1.4bn. Its overall financial obligations stood at Dh8.46bn as of September 30, of which Dh4bn had to be repaid by the end of last year. Fitch says about half of Tamweel's funds come from short-term interbank loans from eight UAE banks and one foreign bank.
"Even though debts of Tamweel and Amlak are rolled over, the fact is that they are in a very difficult financial situation with regards to financing their business in the future," says Mr Howladar. "This is a big concern given their size in the marketplace. The lack of coherent policy is detrimental to their future and that of home finance in the UAE." Amlak's balance sheet lists Dh11.2bn in short-term "investment deposits" due between October and December of last year, much of which is believed to have been rolled over automatically.
Tamweel also has two outstanding sukuk of Dh2.1bn maturing in 2013 and a $235m three-year syndicated loan due in 2011. For the third quarter of last year, Amlak narrowed its loss to Dh45m from Dh65.6m in the second quarter, while Tamweel reported a net profit of just Dh10m in the third quarter, after a loss of Dh35m in the quarter to June 30. While prospects for the merger may be improving, lawyers have expressed concerns that the new panel will detract from the function of the court system.
"Establishing committees to deal with the problems of individual companies should be exceptional and rare," Mr al Tamimi says. "It could happen in special circumstances but should not become the norm. The norm should always be the judicial system." Tom Canning, a partner at the legal firm DLA Piper in Dubai, agrees: "Generally speaking, establishing bespoke dispute resolution committees for specific companies is not something which the international community looks favourably upon.
"It tends to run contrary to certain internationally held principles such as equality, access to the judicial system and transparency." Tamweel and Amlak say the judicial panel will enable a smoother transition to becoming an enlarged lender. Sheikh Khaled bin Zayed, the chairman of Tamweel, says: "There are always some cases of differences between customers and the company. Most of the cases are about payments.
"We saw it [the establishment of the panel] as a good development for the restructuring. If things are a mess with the courts it might delay the merger." Ali Ibrahim Mohammed, the vice chairman of Amlak, says the decree is a step forward in protecting the interests of stakeholders and will further help finalise the merger. @Email:skhan@thenational.ae uharnischfeger@thenational.ae
