The Central Bank is taking the right approach to the problem UAE banks have with credit concentration. But there is a question about timing.
Banks need time to implement lending rules
Spreading the risk is a central tenet of commercial banking around the world. Loans to numerous borrowers, in many and varied sectors of the economy and society, are the best defence against unforeseen crisis, default and collapse.
The International Monetary Fund, the world economy's steward of stable growth, regularly assesses national banking systems. While deeming the UAE's banking network reasonably stable, the IMF has been saying since March that the UAE's Central Bank should monitor risk management at individual banks.
Loans to Europe are one concern, but again this May the IMF also cited "increasing credit concentration" in lending to "government-related enterprises" (GREs), the numerous, prominent operations that inhabit the borderlands between the private sector and Government in the UAE. After the Dubai World crisis of 2009, the IMF says bluntly, "market perceptions of sovereign default risk remain elevated". This is why total GRE debt rose past $176 billion (Dh646bn) last year. The IMF also said more information about GRE debts would improve lenders' confidence.
The Central Bank has responded to the advice about monitoring with the rigour and probity expected of central bankers - but with a little too much haste. In April it imposed new limits, effective last Sunday, on lending to governments and GREs, as a ratio to each bank's capital.
However, the Central Bank gave only six months' notice. The start of the new regime on Sunday surprised bankers, who had been confident of a six-month extension. Unwinding or selling off big loans to GREs on short notice is a recipe for losing money; the few foreign banks with any interest will demand a heavy price. Disentangling the banks from excess GRE loans on tolerable terms may take years.
As banks come into compliance, they may find incentive and opportunity to lend more to private corporate borrowers. This would be a welcome by-product of the new rules, because agile small- and medium-sized businesses can be potent engines of growth. Of course banks must be sure such loans will not go sour, as too many did in 2009.
Experts say they expect the Central Bank to give the banks some time to get into compliance with the new limits. That seems like a practical necessity, but over time these loan limits can be expected to push the banks - and nudge the GREs - onto firmer footing.