Maturity mismatch in Gulf banking sector may worsen

The problem of maturity mismatch in the Gulf banking system is bound to grow worse due to the large number of projects waiting for financing arrangements, according to a report prepared by Standard & Poor's recently.

"According to market information, new project-financing deal flows in the Gulf reached a total of more than $8 billion in 2003 and they are expected to double in 2004," S&P has noted.

But at the same time, S&P said, access to long-term funding sources has been limited.

There were independent reports that the GCC had announced projects worth Dh443 billion ($121 billion), of which the UAE accounted for Dh87 billion ($23.7 billion).

Qatar, with its huge projects in the oil and gas sector, will account for over Dh162 billion ($44.1 billion) worth of projects in the coming years.

Oman, Saudi Arabia, Ku-wait and Bahrain account for the remaining Dh194 billion ($52.8 billion) worth of projects coming up in the GCC, according to the report.

A big chunk of this money will be spent on airport projects which are already under way as well as those earmarked for the future. While Dh15 billion will be spent on airport projects in the UAE, Dh4 billion is the cost estimated for Qatar's new airport.

Another Dh12 billion will be spent on airports in the other GCC countries.

The UAE Central Bank statistical report shows that out of the total time deposits to the tune of Dh156.216 billion with the banks in the UAE, only Dh16.358 billion worth of deposits were of maturities of more than 12 months as of March 31.

Above 56 per cent of these time deposits — valued at Dh88.59 billion, enjoyed maturities less than three months.

However, it is found that the maturity mismatch in the UAE banking system was worse than this in 2002.

"Even though banks have a preference for short-term trade finance transactions, the changing structure of Gulf economies towards larger, more complex and more integrated projects — like independent water and power projects or gas exploration and transportation projects provides incentives to accept longer term tenors," said S&P.

The S&P report also noted that most banking systems in the Gulf still lack efficient, comprehensive and dynamic credit bureaus which could have helped the collective management of corporate banking risks.

Such a systemic drawback has led to the overexposure of the banks to several large debtors who then defaulted or behaved fraudulently in almost all six GCC countries — including the Ali Redha Trading group in Oman, the Al Mannai Corporation in Qatar and the Solo Industries in the UAE.