A shortage of funds with local banks and rising lending rates have added to United Arab Emirate stock market woes and action may be needed at a central level, according to investors and market intermediaries.
The Central Bank may have to consider allowing lenders to set up real estate subsidiaries, according to a report from US investment bank Morgan Stanley.
'It may be necessary to evaluate the extent of the banks' exposure to this sector. The supervisory authorities may need to re-think current rules,' the report says.
The Morgan Stanley report points out that it is difficult to assess banks' claims on quasi-public companies that are heavily involved in the real estate market due to a lack of transparency.
However, it stressed the potential risks to banks from a mild correction in the real estate sector should not be overstated. 'The need for greater market transparency on the part of market participants and regulators cannot be overemphasised at a time of considerable uncertainty in global financial markets,' it concludes.
Banks are already limiting lending in the real estate sector. 'The cost of funds on international markets has gone up and banks are forced to pass on the increased costs to customers. The fund shortage has become so acute that they are forced to limit lending,' said one commentator.
A number of banks confirmed this. Emirates NBD, the largest bank in the Gulf in terms of assets, said it is reducing its exposure to a certain class of personal and corporate loans while taking all measures to encourage deposits.
Bankers say part of the problem is that demand for funds is far in excess of supply. A multitude of big and small businesses launched in the region during the past few years are seeking funding. While some are looking for working capital, others need credit lines for project finance and refinancing of their existing debt.
Six banks in Saudi took the step of announcing that they have no direct exposure to so-called toxic mortgages. Riyad Bank, Al Ajhi Bank, Samba Financial Group, Banque Saudi Fransi and Alinma Bank all confirmed they had no exposiure to the global mortgage market.
Last month the UAE Central Bank offered a Dh50 billion emergency funding facility for banks to tide over the shortage of funds in the interbank market. There is little doubt that banks and real estate companies are running short of money as the global credit crisis worsens.
'The region is taking a cue from the international markets. That is having an impact here. The banking sector here will face a lot of scrutiny as investors fear the real estate sector is a bubble,' said Vyas Jayabhanu, head of Al Dhafra Financial Brokerage LLC.
