(MENAFN - Khaleej Times) Banking industry emerges stronger in the wake of Central Bank's proactive, prudent and timely actions
It has been more than five years since the global financial crisis was first felt, with the sudden collapse of Lehman Brothers, which led to a subsequent domino effect of major corporations failing and a colossal banking crisis being set off that impacted, and continues to impact, the global economy. As is to be expected, the reactions to these crises were many, leading to a whole host of regulatory changes in the way of doing banking business, an overall aversion to risk, an aversion to borrow, and a fear of investments. This resulted in developed markets being plagued for extended periods by the malaise of 'Deleverage, Deflation, and Debt,' while emerging markets saw a slowdown in growth and extreme volatility in markets.
The diagnostics showed that institutions were decimated owing to 'Leverage, Concentration, or Funding,' together with a degradation of ethics of bankers. Globally growth suffered, which is always needed to create a positive sentiment and building confidence, which leads to investments and a surge in much needed employment. Volatility leads to lack of market predictability, making businesses unprofitable and impacting the long-term sustainability of economies. While growth slowed down, populations continued to grow and the number of people in employable age brackets has surged by massive proportions. Since, the individual is the critical link between macro and the micro elements of any economy, it is imperative to address these financial and economic issues or else larger social issues emerge owing to a lack of jobs and unemployment, leading to eventual political instability.
Markets hate instability or lack of clear direction and policy focus, which leads to risk aversion, and the cycle of deleverage and disinvestment becomes more prominent. In such situations, governments need to step in and play a dual role. The first immediate role is one of a regulator to fix the much needed regulatory environment to protect investors, consumers, and fiscal actions to create policies to provide fillip for growth. On the fiscal side, governments step up investment initiatives and new projects to fill the investment void left behind by private investors in such situations. In light of this, the recent global financial crises has redefined the way banking, business and regulations need to coexist, as there is a need for drastic changes to be introduced - including stringent regulations on bank capital, liquidity and corporate structure - which have globally led to a reduced supply of bank loans and incentives to secure assets.
Five years later, while interim growth has been paid as a price, the banking industry is a lot stronger than it was. While the focus of regulators in developed markets has been to repair markets and restore growth, the focus of regulators in emerging markets is to protect their markets from developed market dependence and by being proactive in avoiding mistakes made by their Western counterparts.
The UAE Central Bank too took proactive, prudent and timely actions that not only protected the local markets, but also led to creating a framework of growth leading to the building of confidence of domestic and international investors in the UAE. The global financial crises highlighted some obvious fault lines that all regulators needed to be wary of - namely, the need for consumer protection, prudential lending norms, the monitoring of personal and systemic debt, the funding and leverage of banking institutions, the concentration of mortgage exposures, asset price sustainability, and real estate prices in an economy. The UAE banking regulator addressed most of these very appropriately, which is now paying dividends as more investors are looking at the UAE as an investment destination of choice.
The gradual end of quantitative easing and zero interest rate policy with the imminent commencement of Fed tapering should lead to higher interest rates and stronger US Dollar and as a consequence stronger AED. A stronger AED would be beneficial to the local economy and lead to more purchasing power and savings for expatriates versus their home country currencies. This should translate into higher spends locally as well. These factors make the Hydrocarbon backed USD-pegged currency and advantage and the diversification strategy of the UAE into non-oil sectors a critical imperative.
The UAE's macro economic growth is forecast to be strong over th next few years underpinned by strong fundamentals and the traditional sectors of oil & gas, tourism, trade and logistics. The UAE's continued leadership in building world class infrastructure and being a regional financial center of choice is expected to continue to benefit the financial sector and be a key growth driver. Recent announcements of a planned unification of bourses in Abu Dhabi and Dubai is a positive step forward as it will lead to economies of scale and a better, more liquid and unified platform for customers. A deeper more liquid market and the inclusion in the MSCI Indices all add to greater investor interest in the UAE. Dubai has announced plans to establish itself as global Islamic banking centre and its recent win of the bid to host the World Expo 2020 promises to be a game changer for growth, new job creation and infrastructure all of which will require funding and banking services. With the restructuring of debt in troubled entities, recovery of real estate prices and strong domestic demand, banks are expected to grow strongly.
Given this, the UAE has been pro-active in announcing a number of regulatory changes to help support the financial sector. The UAE Central bank announced a comprehensive retail lending law in 2011, with the dual purpose of controlling lending activities and excessive fees charged by banks while at the same time protecting banks through the introduction of new due diligence compliance requirements. The impact of this law has gradually percolated through the banking sector, building customer confidence and transparency. The UAE Central Bank has recently announced a new mortgage law, and Dubai has increased registration fees from two per cent to four per cent of property value. The new mortgage law requires buyers to put a minimum down payment while purchasing a property using a mortgage. The down payment required increases if the buyer is purchasing a second property. The UAE nationals seeking a mortgage would be limited to an 80 per cent mortgage for first time buyers and 65 per cent for each subsequent home. The same law sets the mortgage limit for expats at 75 per cent for first time buyers and 60 per cent for each subsequent home.
As part of the regulatory initiatives, the central bank recently granted a five-year time frame to UAE banks to reduce their excess balance sheet exposure to government related entities (GREs). Banks are now allowed to reduce excess lending to state entities by 20 per cent per annum until they reach the exposure ceiling set by the central bank. It gives more time for banks to realign their balance sheets while also, giving more time to GREs to seek alternative funding sources. This regulation will provide much-needed impetus to banks to lend to private sector SME and commercial enterprises and individuals, while simultaneously deepening non-traditional funding and capital market sources.
The UAE is also in the process of setting up a new credit bureau which is a huge positive step and is expected to provide banks an accurate view of a potential customer's debts and credit history as well as drive responsible customer behaviour to maintain a good track record. This will reduce the eventual cost of default to banks, and reduce the cost of borrowing for good customers.
The creation of stable financial infrastructure through the use of technology is a key driver of sophistication and progress in any financial system. The UAE Central bank has brought in a number of technology platforms to build a more robust and efficient banking system. These major changes include WPS for worker payroll, ICCS for image clearing of cheques and direct debit for payments.
Even as we pursue a growth agenda, the banking sector needs to refocus on striking a balance on profit objectives and social issues like financial inclusion. There are a large number of individuals and number of customer segments (SME and Blue-collar workers) who tend to be ignored by the financial sector and who need to brought into the formal banking fold through innovative and low cost models which make banking convenient and easy for the masses.
To conclude, a combination of regulatory measures supported by appropriate financial infrastructure, and supervisory frameworks that enforce adherence to rules, have set the stage in the UAE for greater 'predictability, transparency, and integrity' in doing banking business, which is required for ensuring profitability and value-creation, which are imperative for the longer term 'sustainability' of UAE's economy and growth.