The governor of the Central Bank, Sultan al Suwaidi, has moved to allay concerns that banks could be exposed to contagion from the global financial crisis, downplaying exposure to foreign assets and highlighting the dominance of national savings in deposits. The main impacts of the crisis in the UAE so far have been felt in the stock markets, which have slumped by up to 46 per cent so far this year, and in interbank interest rates, which have doubled in four months to 4.7 per cent in response to tightening credit.
"National banks and branches of foreign banks operating in the UAE are constructed on safe and sound foundations," Mr Suwaidi was quoted as saying in a press release issued by the Central Bank yesterday. He is currently attending the annual meeting of the International Monetary Fund and World Bank in Washington, which began today. The meeting focused on the growing crisis of liquidity affecting the global banking system, and policy responses.
Stock markets in Japan, Europe and North America have plunged about 20 per cent so far this month on fears that the liquidity crisis will trigger a global recession. Finance ministers from the Group of Seven industrialised nations also held a meeting in Washington on Friday, when they promised to prevent the collapse of more banks and unfreeze credit markets, without specifying any new measures. "The current situation calls for urgent and exceptional action," the finance ministers and central bankers said in a statement.
President George W Bush said: "This is a serious global crisis and therefore requires a serious global response." The Central Bank pointed to data showing that banks in the country are largely insulated from the global turmoil, and are not over-reliant on "hot money" owned by foreigners who might want to withdraw it to meet cash requirements in other countries. Three quarters of deposits are owned by nationals, while other Arabs hold eight per cent and other nationalities hold 17 per cent, the statement quoted Mr Suwaidi as saying.
The level of exposure of UAE banks to European commercial paper, which normally involves three-month loans, and medium term notes, which typically involve debt over five to 10 years, was only 9.9 per cent, the statement said. These markets have been hit by the global credit crisis, which has severely restricted lending between banks and to industry in developed markets. The impact on lending in the Gulf and GCC has been less severe.
Interbank lending, which acts as the lifeblood of the global financial industry, has seized up in many developed world markets. But Mr Suwaidi said interbank lending represented only 12.7 per cent of the total assets of UAE banks, and most of this money was lent to other banks within the country. The majority of assets of national and foreign banks in the UAE are located within the country, and "their parties are known and sound", the statement added, in contrast to the parties of assets in developed markets, which are often unknown.
Bank reserves and capital represent 11.02 per cent of bank assets, which is considered high according to international standards, known as Basel II standards, the statement said. In response to queries about whether the Government planned to acquire stakes in local banks as governments in the US and Europe have done, Mr Suwaidi said the Government already had substantial stakes in many banks and so there was no need.
tashby@thenational.ae