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In the first quarter, the demand for personal loans recorded the highest quarterly increase since 2014. Image Credit: Shutterstock

Individuals and corporates in the UAE borrowed more in the second quarter of 2022 as improving economic outlook drove demand, the UAE Central Bank said in a recent report, and a stronger increase in lending is forecast in the September quarter.

Lending remained strong despite recent interest rate increases, the apex bank said in its Q2 Credit Sentiment Survey.

Businesses across all emirates, especially the larger firms, borrowed more across categories, as business was buoyed by improved customer spending. The retail and wholesale trade sector was a shining example, where strong sales, and improved property and economic outlook boosted confidence among business owners. Transport and storage, manufacturing and construction were among the other sectors that saw strong loan demand.

In terms of credit availability, an increase in banks and finance companies’ willingness to extend business loans was observed, supported by a change in credit-worthiness of prospective borrowers and tolerance for risk, and improving asset quality.

Individual borrowing rises

Survey results revealed a surge in consumer appetite for credit in the June quarter. The increase in demand was evident across all loan categories with the exception of car loans and loans related to housing refinancing and renovations, the central bank said.

Strong demand for housing-related loans (such as owner-occupier and investment) and credit cards was evident, indicative of solid domestic demand.

The growth in demand was attributable to increased demand for personal loans across all emirates during the quarter, particularly in Abu Dhabi.

The key factors responsible for stimulating a positive change in demand for personal loans were the housing market outlook, change in income, and the financial market outlook.

In the first quarter, the demand for personal loans recorded the highest quarterly increase since 2014 due to the improvement in economic conditions.

With respect to willingness to lend, there was a substantial increase in appetite to extend personal loans. A solid loan demand coupled with strong willingness to lend is forecast for the September quarter, the report said.

According to survey results, 36.9 per cent of respondents reported no change, 57 per cent reported an increase in demand, while only 6.1 per cent of respondents reported a decrease in demand. By emirate, survey results suggest a notable increase in credit appetite and demand for business loans across all emirates, with demand strongest in Dubai.

Strong Q1

Lending remained strong in the first quarter even though interest rates went up in line with global market movements, the Central Bank said in its Quarterly Economic Review. The Central Bank’s main policy rate, the base rate, went up by 25 basis points to 40 basis points on March 17, in line with the US Federal Reserve’s increase.

Overall, bank lending rebounded by 4.4 per cent year-on-year, reflecting improved credit sentiment.

Gross credit stood at Dh1,832 billion at the end of March 2022, compared to Dh1,794 in December 2021.

Domestic credit (89.5 per cent of total loans) increased by 3.1 per cent, compared to the year-ago period. The figure stood at Dh1,639 billion in the March quarter, compared to Dh1,619 billion in the preceding quarter, data showed.

Financially sound

The UAE banking system remained well-capitalised, with an overall capital adequacy ratio of 17.1 per cent, Tier 1 capital ratio of 16 per cent, and common equity tier 1 ratio at 14.2 per cent. The eligible liquid assets ratio, reflecting the banking system’s liquidity, stood at 19 per cent at the end of Q1 2022, well above the 10 per cent minimum regulatory requirement.

Total deposits at UAE banks stood at over Dh2 trillion at the end of March 2022, up 6.6 per cent compared to a year ago. Deposits stood at Dh1,997 billion at the end of December 2021.