The global economic chaos likely has you looking for a safe place to park your cash until the storm subsides. Not more than a year ago, before the implosions of big banks such as Washington Mutual in the US and Northern Rock in the UK, that haven would have unquestionably been an old-fashioned bank account. But these are not ordinary times. The wave of bank failures, including 16 so far this year in the US and many more globally, has cast doubt on the bullet-proof safety of deposits. Nowadays, even the security of cash has become a worry as the globe edges towards a downturn that some say could rival the Great Depression. In case you're wondering, there were roughly 15,000 bank failures in the US back then.
Thankfully, the UAE Government last month guaranteed all deposits in the country's banks, virtually ensuring that nobody will lose their cash stash if the tentacles of the global financial crisis reach the country's financial institutions. While that may sound comforting, a wrinkle in the Government's deposit guarantee appears to mean the protection doesn't extend to every bank customer in the UAE. The original guarantee only explicitly covered domestic banks, meaning those that are headquartered here. The Government later said it would also back up deposits at foreign banks that have "significant operations" in the country. However, an exact accounting of which foreign banks qualified as having significant operations in the UAE has not yet been made and further clarification from the Government is unlikely.
"I don't think they will ever disclose it," said Marios Maratheftis, an economist at Standard Chartered bank, referring to those foreign banks whose deposits are in fact protected. "The point was to create a level playing field for everyone, and if they said which banks are protected it would not make it a level field. But it's very clear that there are some banks with significant operations here."
To be sure, the large international banks serving you and I in the UAE are heavily involved in the country's development endeavours, as they finance much of the country's numerous residential and infrastructure projects. For this reason, the Government has a vested interest in ensuring the smooth operations of those banks. Presumably, then, the protected international banks include HSBC, which has operated here since 1971, before the country was founded, and now ranks as the fifth-largest bank in the UAE. Its sheer size and global network serve as an assurance for many consumers.
"This is a big bank," said Sarmad al Barrak, an HSBC customer in Abu Dhabi who ignored a friend's advice to switch to a domestic bank because of the deposit guarantee. "It has a lot of branches all over the world, and it's a global bank. I am not worried about it." Other foreign banks covered under the Government programme would likely include Barclays, Standard Chartered, Citibank, Royal Bank of Scotland, Habib Bank AG Zurich and the numerous other international banks that have sizable footprints in the country. However, in the absence of specific official backing for international banks, many of them point to their strong balance sheets and stability amid the financial crisis as reason enough to feel safe.
HSBC, for example, emphasizes that it is the world's largest retail bank, with roughly $1.2 trillion (Dh4.4 trillion) in deposits and a low amount of loans relative to deposits. Barclays, Britain's third-largest bank, says it has held up well during the crisis and was the only UK bank not to take part in a government fund-raising programme. "If we get confirmation from the Central Bank that we were included in the [deposit guarantee] programme, then it would be an additional comfort for our consumers," said Michael Miebach, Barclays' managing director for the Gulf region. "But regardless of that, your deposits are secure with Barclays because we have enough capital and we did not even need the British government's help [in raising money]."
While customers at these big banks can likely rest easy, it is less clear whether the Government's deposit guarantee will extend to foreign banks on theperiphery. If you do business with Janata Bank or El Nilein, for example, which each have only a limited number of branches in the UAE and relatively few customers outside expatriates from their own country, you are logically less likely to be protected by the Government scheme. Several banks from other GCC countries have limited exposure in this country, but it is probable that they would be protected under the Government programme, since members of the six-nation organization appear to be co-operating together in addressing the current crisis and working towards creating a monetary union.
But you are not necessarily left fully exposed if you bank with a small foreign bank that mainly serves expatriates from its home country as a depository and remittance institution. Some of these institutions in the UAE, such as the Indian Bank of Baroda, have deposit-protection schemes that extend to savings held abroad. LJ Asthna, the chief manager of retail and corporate banking at Bank of Baroda, said that Indian authorities guarantee the bank's deposits, including the Dh6 billion or so in UAE accounts. Mr Asthna is not worried about his clients leaving Baroda for a domestic institution because most of the bank's customers are Indian expatriates who send larege amounts of money home through its network. "We have loyal customers," he said.
There is, of course, always a possibility, no matter how remote, that things could unravel here. Look at neighbouring Kuwait. It has given a guarantee similar to the one in the UAE, but since it does not allow foreign retail banks to operate within its borders there is no question about which banks are covered. The recent turmoil there, with customers making runs on banks and the chairman of Gulf Bank, the nation's fourth-largest lender, resigning, illustrates the potential vulnerability depositors face, even in the oil-rich Gulf.
And with banks in the UAE and Kuwait being downgraded by ratings agencies, deposit guarantees become ever more important for maintaining calm among antsy depositors. However, for the most part, it appears that customers here are well protected from massive bank failures like those we have seen in the past few months in the US, Europe and elsewhere. The Government's swift and effective measures to protect customers and reinvigorate the banking system by injecting billions of dirhams into interbank lending markets only add to the hardiness of the system.
Many observers call the Government's move to guarantee deposits a reassurance measure in the face of the bank failures in the West, especially since the UAE lacks an institution that guarantees deposits, such as the US's Federal Depository Insurance Corporation (FDIC). Arup Mukhopadhyay, an executive vice president and head of the retail banking group at Abu Dhabi Commercial Bank, applauded the Government's move to shore up the system, but said he doubted that any UAE bank would face failure and need the Government to underwrite its deposits.
"It's a confidence-building measure, but whether it will come to that stage [in which the country faces bank failures], I don't think so." Mr Mukhopadhyay does not believe that the UAE has plans to create a body similar to the FDIC because the banking system is too small and the Government's partial ownership of most domestic banks makes such an institution redundant. So wherever you stow your money in the UAE, it is almost certainly safe. With the Government's vast wealth and huge oil reserves, it's highly unlikely the UAE would not bail out bank customers if things do get ugly. But if you want to be overly cautious, a government-owned bank offers the safest haven.
Mohammed al Bady, an English teacher who lives in the capital, keeps his money in Abu Dhabi Islamic Bank. "It's Government-owned, and because of that I'm sure there will never be any problems with this bank," he said. You will likely be fine if you follow Mr Bady's lead, but keep in mind this middle eastern proverb: "Trust in god but tie your camel tightly". @Email:firstname.lastname@example.org