The banking sector in the UAE operated in an environment of new market realities in 2016. Revised oil prices, China’s slowdown and regional conflicts are some of the persistent stories that weighed heavily over local and international indices.
These trends require that banks calibrate their expectations, as the high margins and profits of yesteryears might not be a sustainable ambition. In one way, this relative slowdown is good for the long-term health of the banking sector, as it encourages players across the industry to place greater emphasis on innovation to increase business efficiency and drive future growth.
Sustainable businesses are crucial for a resilient economy that fosters investor confidence across economic cycles. In a bid to support this vision, banks in the UAE explored bold policy reforms to help businesses, especially SMEs, weather the effects of market challenges, and in the process develop a robust and efficient lending platform.
The bankruptcy law that was announced last year will come into force in the first quarter of 2017. This will serve as an instrument of stability and risk mitigation and provide for the creation of a pre-emptive settlement regime under which creditors will actively work with their customers in restructuring debts. As the whole process is overseen by the courts, this would mean greater assurance of repayment for lenders while businesses are saved from the immediate threat of bankruptcy, allowing them to maintain normal operations.
A glimpse of its potential can be seen in the new debt restructuring guidelines introduced in 2016 specifically for SMEs. Under these measures, banks in the UAE agreed to suspend legal action against defaulting SMEs while the UAE Banks Federation worked with the struggling enterprises to restructure their dues. Since March 2016, loans worth approximately $1.9bn have been restructured or are under restructuring, including $1.23bn in SME loans and $680m in loans to large corporations.
Part of the efforts to boost the credentials of financial instruments in the UAE involves aligning with regulatory frameworks such as IFRS9 and Basel III, and streamlining existing procedures like the proposed reforms in EiBOR calculation for better data uniformity. Increasing capital and liquidity requirements as mandated under Basel III, for instance, will set the tone for stronger preparedness against potential market shocks.
The growing burden of international regulation is also causing many banks to de-risk — (ie), lower their risk by cutting off or reducing business with certain customers, impacting banks and their relationship with exchange houses and businesses. The UAE Banks Federation is closely working with the Central Bank of the UAE to boost the level of compliance of all banks, in order to reduce the impact of de-risking.
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Incorporating new regulatory frameworks is usually met with initial reluctance due to the increased operating costs, but as our transactions cut across national boundaries and the UAE becomes a global economic hub, international regulations become instrumental for financial security and long-term growth.
Transforming customer experience in banking, led by a strong and unified framework for handling complaints, will also drive our efforts in the upcoming months. A standard framework for customer complaints will infuse greater transparency and efficiency when dealing with grievances, and make the redressal process more meaningful and time-bound.
Going forward, grooming the next generation of Emiratis to bolster human capital in the financial sector will be a critical factor for success. The new Emiratisation strategy, scheduled to come into force in January 2017, adopts a point-based system under which banks are rated and rewarded based on their performance across key parameters such as creation of job opportunities for UAE nationals, training and development as well as their success in moving Emirati employees to senior-level positions.
Our projections into the future must be realistic, and to that degree, outlook for 2017 looks challenging with profit growth expected to remain in the range of plus or minus 5 percent.
However, comfortable liquidity, a loan-loss coverage of 104 percent and strong capitalisation in a diversified economy will help banks withstand the headwinds. With proactive, industry-wide initiatives that secure the trust of consumers and global investors, the UAE’s banking sector can confidently withstand a blip to thrive in a bright future ahead.
AbdulAziz Al Ghurair, chairman of the UAE Banks Federation