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Figures released in the UAE indicate that bank deposits in the country reached their highest level in over two years. Deposits in the banking system stood at AED 1.105 trillion (US $301 billion) in March, up 5.3 percent since December, Central Bank data showed.

 

This is in line with predictions made by Political Capital earlier in the year, as money has moved from less stable locations in the region. However, UAE banks remain hesitant to lend. UAE private sector credit was up only 2.0 percent year-on-year in February, a second monthly rise in a row following at least 13 consecutive months of declines. The Governor of the Central Bank called on banks to ease lending by lower interest margins.

 

May 20, 2011

 

 

Analysis and Forecast: Decreasing Risk


 

As predicted by Political Capital, UAE banks have increased deposits as a result of the regional unrest. However, liquidity has still not sufficiently increased to have an impact on the economy. The reason for this is two-fold.

 

The first is the reluctance of banks to lower their lending rates, fearing a repeat of bad debts that have plagued UAE banks since the crash of the Dubai real-estate market.

 

Secondly, the mixed signals from government officials. On the one hand, they are encouraging banks to start lending by lowering rates, whilst on the other, they are making lending more difficult in some areas to minimize the risk of bad debt and avoid a repetition of the recent crisis. For example, the Central Bank has passed a regulation that makes car-buyers pay a minimum 20 percent deposit on car loans. The law has become effective at the start of May 2011, and is understood to have had a detrimental impact on the car sales industry, although no figures are yet available.

 

So whilst the country’s banks are more capable than at anytime since the end of the recent boom to lend, reluctance to lend, due to the combination of factors is resulting in potential economical benefits not being realized.