The Central Bank Governor has issued a fresh warning to banks that fail to comply with new rules aimed at curbing excessive service fees.
Sultan al Suwaidi's comments yesterday follow HSBC's decision to scrap its free international telegraphic transfers service for customers while cutting the interest they earn on deposits.
The bank's move came just a week after the regulator unveiled a raft of limits on service fees and capped the amount that banks can lend to individuals.
Asked what action would be taken against lenders that hiked charges above agreed caps, Mr al Suwaidi said: "They cannot do that, they will be fined. I don't think they can afford to do that as it will cost them money."
HSBC did not break the new Central Bank rules but customers have complained that scrapping free services and lowering interest rates increases the cost of banking with them.
Under the regulations, the Central Bank plans to publish on its website details of bank charges to enable customers to compare fees between lenders, he said. "If their rates are too high, they will lose customers."
The Central Bank will cap the cost of setting up a standing order instruction at Dh50 (US$13.60) and limit the fees on foreign currency transactions to 2 per cent of the exchanged amount. Banking chiefs have insisted new Central Bank rules on retail lending will not lead to a squeeze on customers.
HSBC will add a Dh50 charge to international money transfers from April 8 and cut interest rates to zero on its Advance Accounts, while loan processing fees will also increase as a promotion ends.
Rick Crossman, the UAE head of personal finance for HSBC Middle East, said the changes were not a reaction to the Central Bank circular regarding the regulations, and HSBC was still in discussions over the rules, although he stopped short of ruling out further fee increases.
"The fees offset some of the changes we've already made, which are in customers' interest," he said, citing a withdrawal of salary transfer fees worth more than Dh1,200 annually.
The international transfers were used by only 10 per cent of customers and market research had suggested those customers preferred easier access to credit, he said.
"It's creating a higher fee for those people who're not taking advantage of that service."
Other bankers said the industry may have to utilise more carrots than sticks to attract customers.
Andre al Sayegh, the chief executive of First Gulf Bank, said the bank would attempt to retain its customer base through incentives in other areas of the bank's operations.
"There are always ways to offer perks to customers," he said.
The new rules would result in a stronger economy for the UAE, he said. "You need a healthy economy, not an economy which is overburdened with debt."
However, he predicted other banks could follow HSBC in lowering rates, saying high UAE deposit rates would eventually fall in line with lower interest rates paid on US deposits, because of the dirham's dollar peg.
Raj Madha, a financial analyst at the investment bank Rasmala, said banks would inevitably seek to avoid being squeezed by the new lending rules. "We saw quite a lot of liquidity coming into the system in November and December - that all suggests that banks were going to compete less aggressively for deposits."
However, a slowdown in the domestic economy had been hampering growth among retail banks, he said.
"There isn't really much growth in any area of the business. When there isn't much growth, either they can give up looking for growth or they can be more competitive.
"And if everyone's trying to take more share that almost inevitably means some decline in underlying profitability," Mr Madha said.