Banks start to change their strategies in light of new regulations from the Central Bank on retail lending.
Banks forced to change tactics
Lenders in the UAE are rushing to introduce strategies to try to maintain profits in the face of Central Bank rules designed to end high fees and curb excessive lending.
Last month, the Central Bank issued a circular putting a cap on the size of personal loans banks were able to lend to individuals to a maximum of 20 times a borrower's salary or total income.
The rules will also keep processing fees to 1 per cent of the loan amount, and limit repayments, credit cards and car loans.
But a report from Nomura said the rules would curtail profitability among banks, with First Gulf Bank, Abu Dhabi Commercial Bank and Union National Bank likely to be the most vulnerable.
"The circular is likely to cause a slowdown in retail lending activity," the report said. "In fact, we believe this circular might negatively impact banks' fee-income generation and also force banks to review their business growth strategies, with less focus on the retail sector.
"We believe that one of the key restrictions, which limits the repayment period to 48 months, will reduce the affordability for loans."
Net loans and advances grew slowly in the 12 months to the end of January, rising 2.7 per cent to Dh1.04 trillion (US$283.14 billion), Central Bank data show.
"This is just another decision from the Central Bank that First Gulf Bank will adhere to," a spokesman for the lender said.
"If it has any impact on revenue or profitability of the retail segment, I'm sure our team will be creative enough to come up with new products to capture more."
Other banks have opted to expand overseas recently as a means of shielding their profits from a slowdown in UAE retail lending.
The National Bank of Abu Dhabi is seeking an Islamic banking licence in Malaysia and a licence to begin operations in Shanghai.
Louis Scotto, the head of retail banking at Doha Bank, which has a branch in Dubai, said the circular would not greatly affect lending for other Gulf banks operating in the Emirates.
"The UAE held out the longest in allowing a totally free market," Mr Scotto said. "These changes will have little or no impact on our present lending criteria but they will help to determine our future loan plans."
The Emirates Banks Association, which represents the country's lenders, said it was also in discussion with the Central Bank because of the rapid change in the rules, which are due to come into effect a month after they are published in the Official Gazette.
Julien Faye, the head of financial services at Bain & Company Middle East, said there could be difficulties in implementing the rules but their net effect would be a healthier banking sector. "It could be a win-win," Mr Faye said.
"The banks have the same interest as the Central Bank - they don't want to go again into a vicious circle where they lend more and more just to increase profits."
Huge personal loans were common until the global financial crisis sapped liquidity from the banking sector.
But banks have drawn criticism for their charges, which had risen to sustain profits until stronger consumer spending returned.