The credit shortage has eased, with local banks no longer borrowing emergency funds from the Central Bank, its Governor, Sultan al Suwaidi, said today. "It has not been needed at this point in time because liquidity is better," Mr al Suwaidi said, adding that the banks had reduced their borrowings to "zero". In September, the Central Bank offered Dh50 billion (US$13.61bn) to the banks to help fight the credit shortage, but analysts say the banks have been reluctant to take up the offer because of restrictive terms.
The original facility was meant to combat a cash shortage caused by an outflow of speculative money last summer. Since then, international banks have also grown less willing to lend, which has exacerbated funding shortages. According to Andrew Gilmour, an economist at the Samba Financial Group, the reason banks stopped borrowing from the facility was because of the terms of the loans. "The terms [on the Central Bank facility] were not as attractive as they could be," he said.
The Central Bank has since revised the conditions on the loans. According to the most recent announcement, banks are allowed to borrow from the facility at 2.5 per cent interest, which is 1.5 per cent above the Central Bank's repurchase rate. "It was an emergency facility that was quite restrictive, and because we didn't get to an emergency situation there was no need to draw on it," said Raj Madha, an analyst at EFG Hermes.
Economists and bankers have recently said that the Government's measures fell short, since banks were still reluctant to lend. On Monday, Standard Chartered Bank estimated that another Dh110bn of emergency funds was needed for the financial system to become healthy again. "It will take time until banks feel comfortable. When they feel comfortable, definitely they will resume lending," Mr al Suwaidi said.
There may be other factors contributing to a slowdown in lending, according to Mr Gilmour. "A slowdown in credit growth may not just be a question of liquidity issues at the banks, but also a general slowdown in economic activity In a downturn it's not just that banks may be restricting credit; borrowers also require less credit," he said. Interbank lending rates, which measure the availability of short-term funds in the banking system, have declined in recent months, from a high of 4.787 per cent in October to a low of 3.9313 yesterday. Analysts say they remain relatively high, however, compared with April of last year, when the three-month rate fell as low as 1.8607.
In October, the Ministry of Finance also pledged to inject Dh70bn into local banks in the form of long-term deposits. So far, only Dh50bn of those funds have been distributed. However, analysts say that the local banks' eagerness to receive the deposits is a sign that there is still a need for additional funding in the system. "If the liquidity situation was fine, banks wouldn't have used the [funds] provided by the Ministry of Finance," said Sofia el Boury, an analyst at Shuaa Capital in Dubai.
Two weeks ago, the Government of Abu Dhabi injected Dh16bn of capital into five of the emirate's banks. So far, there has been no indication that a similar injection is being planned for Dubai banks, which were hit harder by the effects of the global financial crisis last year. Mr al Suwaidi said the governments of Dubai and Abu Dhabi must decide whether the Dubai banks should receive a similar injection, since both emirates owned stakes in the Dubai banks.
"It is a shareholders' decision. The Government of Abu Dhabi is a shareholder in these banks," he said. "Whatever the shareholders decide for their banks, we would welcome it at the Central Bank." Some analysts would also welcome such a move. "I do think a capital injection should be made into the Dubai banks to restore the symmetry," Mr Madha said. firstname.lastname@example.org