U.A.E. Guarantees Bank Deposits, Interbank Lending

By Matthew Brown and Arif Sharif

Oct. 12 (Bloomberg) -- The United Arab Emirates guaranteed all deposits with local banks, including the country's two- largest lenders Emirates NBD and National Bank of Abu Dhabi, to ensure that credit continues to flow.

The measure, which also includes a guarantee of all inter- bank lending in the U.A.E., is designed to ``ensure continuity of economic growth and protect the national economy,'' state- owned Emirates News Agency reported, citing Prime Minister Sheikh Mohammed bin Rashid Al-Maktoum.

Twenty four local and 28 foreign banks operate in the U.A.E., where record oil revenue has spurred an economic boom. The seizure of global credit markets in the past few weeks has crimped lending in the local interbank market as well, prompting the U.A.E. central bank to set up a 50 billion dirham ($13.6 billion) fund to boost liquidity last month.

``This won't be enough to stop the flight of capital to larger banks,'' Giyas Gokkent, head of research at the National Bank of Abu Dhabi PJSC, the U.A.E.'s second-biggest bank, said in a telephone interview from Abu Dhabi today. ``It is useful, but not sufficient to get banks lending again.''

U.A.E. nationals own 75 percent of all bank deposits and foreign borrowings only funded 9.9 percent of banks' assets, ensuring their ``strong financial position,'' the U.A.E. central bank said in separate statement today.

Interest rates rise

Reflecting the tight liquidity, the one-month interbank offered rate, the price banks charge each other for loans in the U.A.E., climbed to 4.6 percent Oct. 9 from 3.2 percent a month ago, Bloomberg data shows.

U.A.E. banks have largely sidestepped the credit crisis as most banks used their resources to fund local growth. ``The majority of assets of national and foreign banks operating the U.A.E. and their parties are known and sound,'' the country's central bank Governor Sultan Bin Nasser al-Suwaidi said today. About 77 percent of U.A.E. bank loans are backed by assets.

Arabs own 8 percent of the bank deposits while other nationals own 17 percent, the central bank said today. Lending by U.A.E. banks surged 49 percent in the year to June.

U.A.E. banks ``don't have bad loans,'' Gokkent said. ``The problem here is that the private sector has been growing faster than deposit growth and the gap has been met from external funds.'' Bank deposits grew 16 percent from December to June to 837.7 billion dirhams, while loans grew 23.8 percent to 893.9 billion dirhams, U.A.E. central bank data shows.

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.netArif Sharif in Dubai at asharif2@bloomberg.net