Credit squeeze adds to local market woes

Dubai: A shortage of funds with local banks and rising lending rates have added to UAE stock market woes, according to investors and market intermediaries.

"The cost of funds on international markets has gone up and banks are forced to pass on the increased costs to our customers," said the retail banking head of a local bank. "Now the fund shortage has become so acute that we are forced to limit lending."

A number of local banks confirmed yesterday that they have started limiting their loans to corporate and individual customers.

Emirates NBD, the largest bank in the Gulf in terms of assets, said yesterday that the bank is reducing its exposure to a certain class of personal and corporate loans while taking all measures to encourage deposits.

Encouraging deposits

"The bank is taking all measures to encourage and retain our deposits to boost our local funding sources in the context of the tight liquidity situation in the local interbank market and the international markets," said an official.

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 country 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.

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. Analysts say the funding squeeze is temporary and the UAE has the capacity to tide over the shortage as the government is amply liquid.

"While financing conditions are becoming more challenging, we don't consider that the creditworthiness of rated domestic entities will be affected," Standard & Poor's credit analyst Farouk Soussa said.

"Refinancing risks will be contained, and the willingness and ability of the government to provide implicit or explicit support in the event of serious financial distress remains strong," he said.