Tougher bank rules a threat to Gulf trade

New rules aimed at making the global financial system safer threaten to jeopardise trade flows in the region.

UAE banks can comply with Basel III regulations. Pawan Singh / The National

New rules aimed at making the global financial system safer threaten to jeopardise trade flows in the Gulf.

Finance:

Industry Insights Exclusives you can bank on from The National's premium content. Learn More

Regional banks are gearing up to comply with Basel III rules, designed to shore up the capital of banks and help them better cope with financial shocks such as the 2008 global market meltdown.

But the boost in capital required under the regulations that are being phased in from 2013, could hamper the financing of trade in the Gulf, say analysts. Many businesses are already struggling to access capital as regional banks keep their lending tight in response to global economic concerns.

"The main impact is expected to be on trade financing by making it more expensive to access trade finance," said Raj Madha, banking analyst at Rasmala Investment Bank.

Trade is a lifeblood of business in the Gulf. The financing of exports forms an important contribution to helping the region's economies diversify away from oil.

Lending in the region has already cooled in recent months. The volume of loan deals in the GCC has dropped to US$5.5 billion (Dh20.2bn) so far in the second half of the year, compared with $15.8bn in the first half of the year, according to data reported by Reuters.

The smaller volumes represent a rapid downturn from 2008, when a ready supply of credit funded a plethora of projects in the region, accelerating economic growth.

When some borrowers become unable to repay their loans, banks tightened lending to give them time to cleanse their balance sheets of bad debt.

A recovery in lending is now being hampered by the withdrawal of European banks from inter-bank loan markets in the region.

Many European banks are already restricting their lending as a result of the euro-zone debt crisis and in anticipation of the higher capital requirements under Basel III, say analysts.

But Jassim Al Mannai, the director general of the Arab Monetary Fund, yesterday downplayed the impact of the crisis on the Arab region's banking system.

"The Arab region has been keen to diversify our relationship so we are not tied to a certain region," he said.

"We are very well diversified, dealing with Asia and America, so I don't think we have a big problem."

The region's central banks are preparing financial systems for Basel III.

Saeed Al Hamiz, the senior executive director of banking supervision and operations at the UAE Central Bank, said: "Basel III will not be a problem and we are in discussions to prepare for it. We have a big team in the Central Bank who are doing a lot of work on regulations and we are at an advanced stage in Basel II."

To be up and running by 2019, Basel III requires banks to hold common equity tier one capital of 7 per cent.

GCC banks already have a tier one capital equity of about 15 per cent, higher than Europe where the ratio is believed to be about 10 per cent. UAE banks already comply with Basel II regulations, which require a lower capital requirement.

Bahrain's Central Bank is planning to set up an internal committee to examine the readiness of lenders to meet Basel III, said Ahmed Abdul Aziz Al Bassam, the director of licensing and policy at the Central Bank of Bahrain.

Banks in the kingdom were unlikely to face problems complying with the rules, he said.

"Basel III focuses on capital and liquidity and is in response to the financial crisis," he said. "When the crisis happened we were not highly leveraged."

International banks have already warned that complying with the higher capital requirements of the rules may curtail growth by forcing them to cut lending.

Despite holding higher capital ratios, a move within the banking industry to build bigger capital cushions is still expected to impact how Gulf banks operate, say analysts.

twitter: Follow and share our breaking business news. Follow us