UAE Banks Crop Bad Loans

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The Central Bank has forecasted an increase in non-performing loans (NPL) in the banking system. The main reason attributed to the NPL is an oversupply of units in the property market. The NPLs rose by 6.67 percent at the end of month April, which is up from 6.25 percent at the end of December. In line with the Islamic finance, the NPLs are likely to remain on the high in the remainder of the year.

According to Saeed al Hamiz, the senior executive director of banking supervision and examination at the Central Bank, whenever there is a crisis, the ability of people to payback is affected. However, the property market is now recovering. Al Hamiz said that there is potential in the property market and demand for real estate has gone up. He also said that there is an urgent need for lenders to safeguard against worsening of the situation.

Banks had increased loans to the property market before the global financial crisis when at that time the prices soared. But the sudden collapse in prices by more than half brought heavy losses to the banks. Adding fuel to the burning situation, lenders were unable to reschedule the debts of some companies. Dubai World finally signed a US $24.9 billion (Dh91.46bn) debt restructuring agreement with its creditors in March. The default of two Saudi conglomerates, the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, in 2009 have also caused pain to banks.

BothIslamic banking and conventional banks havesimilar issues regarding the NPLs. According to the latest Central Bank data, total NPL provisionsof banks rose by36 percent to Dh44.3bn. Compared to other GCC banks, the asset quality of UAE is in bad shape. The Central Bank has decided to tighten regulations to curtail retail lendingin order to reducebad loans.

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