The Cabinet has approved the formation of a new Dh10 billion (US$2.72bn) development bank, as the UAE banking sector takes its first big step towards consolidation amid the continuing credit squeeze. The Government will inject half of the capital to establish the Emirates Development Bank, which will combine Emirates Real Estate Bank with the Emirates Industrial Bank (EIB), the state news agency WAM said yesterday.
It is only the second government-backed merger to have taken place within the banking sector after Emirates Bank and National Bank of Dubai were merged in 2007 to create Emirates NBD, the largest banking entity in the country. "The aim of this merger is to enhance efficiency, which under the current circumstances makes sense," said Wadah Taha, a Dubai-based independent financial analyst. Gulf banks have been hit by tightening liquidity after foreign investors withdrew capital from the region last autumn. Local lenders are now considering merging with other banks as a way of strengthening their balance sheets and competing against larger international rivals.
The Government said last November that it planned to establish a new lender by combining Emirates Real Estate Bank with EIB, while at the same time merging Amlak Finance and Tamweel, the UAE's two largest Islamic home finance providers. However, yesterday's announcement failed to shed more light on the fates of Amlak and Tamweel, which are currently undergoing restructuring. Their exclusion has stoked speculation about the future structure of the two Islamic lenders.
"This deal is the first step in a multi-step process where the Government is trying to restart the mortgage and housing finance market," said Deepak Tolani, a banking analyst at Al Mal Capital in Dubai. "We think the mandate of the new bank would be to focus on mortgage financing, but we still need clarity on the future of Tamweel and Amlak, and how the funding would come about." The Government is reviewing several options submitted by the Ministry of Economy Steering Committee, which is overseeing the restructuring of Tamweel and Amlak. These include merging the two home financiers, injecting funds, or buying up part of their loan books. A decision is expected to be announced soon, although analysts question why it has not yet been disclosed to investors more than six months after the Government intervened and trading in the shares of both companies was suspended.
"It's unclear why they haven't got to the bottom of the Amlak-Tamweel saga, it's taken way too long to arrive at a solution," said Eric Swats, the head of asset management at Rasmala Investments. "People have been holding stock in these firms for months with no idea as to what will happen." Amlak said in a statement to the Dubai Financial Market yesterday: "Discussions directly with banks as well as through the merger steering committee on a long-term funding plan for Amlak are ongoing and we expect the results will be announced soon by the Government." However, it denied reports that it will receive a cash injection "soon".