UAE banks sharply boost reserves with Central Bank

UAE banks boosted their mandatory reserves with the Central Bank by more than Dh13 billion in the first half of 2008 as part of a CB drive to stem excess liquidity and tackle high inflation, official figures showed yesterday. But the CB is expected to have eased its rules on the required minimum reserves in the second half to free funds for banks after the global financial crisis reversed the liquidity situation from a surplus to crunch. From around Dh33.58 billion at the end of 2007, the required reserves with the CB by the country’s 24 national banks and 28 foreign units jumped to nearly Dh47bn at the end of June, an increase of about Dh13.4 billion, showed the figures by the Central Bank. The increase boosted the ratio of the reserves above the 14 per cent floor to around 16 per cent of the banks’ current and saving accounts at the end of June compared with nearly 15.1 per cent at the end of 2007. « The banks’ actual reserves with the Central Bank dropped by Dh3.92bn or around 7.1 per cent to nearly Dh51.12bn at end-June 2008 from Dh55.04bn by the end of 2007, » the Central Bank said. « But their required reserves surged by Dh13.48bn or nearly 40.1 per cent to Dh47.06bn. As a result, their excess reserves reduced by Dh17.40bn or 81.1 per cent to record Dh4.06bn balance compared with Dh21.46bn at the end of 2007. » Bankers said the increase was apparently a result of stricter rule by the CB to force the banks to boost their required reserves to mop up soaring liquidity, which is normally associated with high inflation. Another reason was that there was an increase in the banks’ combined current and saving accounts from around Dh219bn at the end of 2007 to nearly Dh293bn at the end of June 2008. The ratio of the reserves at the end of June was also far higher than the minimum one per cent of time deposits as it swelled to 6.7 per cent of those deposits of nearly Dh692.7bn, according to the CB report. « The required reserves could be now lower than their June level because it believe the CB has eased its rules in this regard to ensure banks have sufficient liquidity. This was evident in its recent decision to approve Dh50bn in emergency funds for the banks, » an Abu Dhabi-based banker said. Despite the surge in required reserves, the banks’ net overall credit position with CB tumbled by nearly Dh90bn to Dh128.1bn at the end of June 2008 from Dh217.5bn at the end of 2007, the CB figures showed. It gave no reason for the sharp drop but bankers attributed it to the banks’ decision to recover a large part of their investments in the form of certificates of deposits issued by the CB over the past year to absorb liquidity. Strong domestic demand for credits caused by the economic boom boosted the UAE banking sector’s loans and advances above their deposits for the first time to turn the UAE into the largest Arab lender relative to bank deposits. Nadim Kawach