Both international and local banks based in Abu Dhabi are positioning themselves to take advantage of exciting growth opportunities.
Vibrant, thriving, booming, prolific, prosperous are all qualifiers used to describe the United Arab Emirates over the last half decade. At the heart of the country's expansion is the banking sector, an increasingly significant and powerful player in the UAE's growth, more specifically for Abu Dhabi.
Being one of the main engines for financing, banking is one of the first industries to benefit from a growing economy. Over the past three years, the total number of banking institutions — both foreign and national — has grown at an annual rate above 10 per cent which peaked at almost 15 per cent in the first nine months of 2007. With a GDP growth forecast of around seven per cent for the UAE, financial institutions are in excellent shape for 2008.
Changed environment
With the banking sector branching out into different ventures including property finance, investment banking and private wealth management, banking in the capital has never been so charged. Both international and local banks based in Abu Dhabi are positioning themselves to strategically take advantage of exciting potential growth opportunities that have steadily but increasingly been presenting themselves.
With the UAE population increasing seven per cent a year, the banking market is rapidly changing and strategies are centred on acquiring new customers, proving to be an ideal milieu for consumer banking.
The expected population in 2030 according to 'Plan Abu Dhabi 2030' is 3 million — more than double its current size, and resulting in an increase in business opportunities which will further drive the banking and financial sector.
Bright prospects
As of the middle of last year, there were 47 banks — local and international — operating in the UAE. The banking system is healthy and enjoys strong levels of capitalisation and profitability.
With the number of banks expected to increase, competition will only become more fierce presenting better opportunities for both wholesale and consumer based customers. The population growth and the economic expansion are all encouraging signs for future prospects of the industry.
Currently, there is a lot of speculation in the market around credit bureaus, it is hoped that the government will establish one shortly. It will help the industry to soundly price their risks, and provide better terms and conditions for the market. At the same time it decreases the results of any market disruption and its impact on the overall economy. With the absence of a 'federal credit bureau' banks are more conservative in credit card and personal loan businesses.
Despite the current lack of such a bureau, the credit card market has managed to gain cultural foothold continuous traction, a trend which should continue, while private banking has developed immensely in a highly competitive environment.
Islamic banking
Islamic banking is one of the key areas of growth with the majority of banks in this market now offering products and services in this sector. More recently new banks are entering this market including Al Noor Islamic Bank which plans to launch large scale Islamic banking on both the consumer and wholesale banking fronts and Al Hilal Islamic Bank, a bank with a capital of Dh4 billion — currently in its formative phase predicted to begin operations in the next 12 to 18 months.
Although Islamic banking and private banking are both becoming an increasingly big focus for the banks based in the capital, the major part of local banks with operations in Abu Dhabi is formed of real estate finance — considered one of the main and fastest developing sectors. The banks have highly specialised contracting and real estate teams that overlook and analyse requests from land owners, developers and contractors who are looking to increase their assets and income base.
Structural shift
In the context of the regional economy, there is a lot of current talk about the '3 Ds': decoupling, diversification, and the dollar.
While the Middle East and Asia are said to be 'decoupling' from the economy of the world due to reverse trends, we prefer to use the term 'insulated' rather than 'decoupling.'
We are experiencing a structural shift taking place in the economical powers — a shift that sees the weight moving from West to East.
However, with the world's strongest economies currently facing issues that are not affecting the regions of the Middle East and Asia, it is too soon to say whether the region is decoupling.
The UAE's policy of diversification has proven a healthy and successful economic model; with the country deciding to break away from the oil and gas sector as its only economic generator, the UAE's government expenditure on diversification has expanded the country's wealth over the last few years and is a driver of growth at times where other economies are facing issues.
As for the dollar, one of the most measurable impacts of the US economic context on the local economy is through the peg that links the dirham to the US dollar. The sub-prime mortgage crisis in the US led the Federal Reserve to cut its interest rates repeatedly from 4.75 per cent at the end of the summer to three per cent currently with a fall of 1.25 percentage points in less than a week recently.
It is because of the peg, that the UAE Central Bank has to shadow exactly every single move of the Fed. Unfortunately, the problem is the two economies happen to be in opposite economic cycles.
So while the US needs to cut its rate in order to support its ailing economy, the UAE should be in fact raising it in order to tighten money supply creation — something it cannot do due to the peg.
Consequently the fall in the interest rate in the UAE will further ease the money creation process in a context where liquidities are already very high and would need some drain. The impact is mostly on inflation and its embedded risks. We have been vocal about the dollar peg, expecting authorities to respond and to revaluate the currency at 8-10 per cent.
Generally speaking, the economy is still relatively insulated and should grow on strong oil prices, government expenditure on economic diversification, and a strong aggregate demand.
In conclusion, the main forecast now is that we will see more and more opportunities arising in Abu Dhabi with growth prospects remaining strong in to the foreseeable future not only for the banking and financial sectors but for all industries.
— The writer is Chief Executive Officer, Standard Chartered, Abu Dhabi and Al Ain.
