Banking and Financial Services in the UAE - Case Study Example

BANKING AND FINANCIAL SERVICES: UNITED ARAB EMIRATES Introduction Financial services entail all the services offered by the financial industry and the same case applies to banking services. These industries; banking and financial industries, encompasses a broad spectrum ranging from all organizations dealing with money management. The main ranges are banks, credit unions, consumer finance firms, insurance companies, credit and debit card companies, investment funds, stock brokers, and different government enterprises. UAE’s GDP in the year 2008 was around US$82.11 billion. The economy of the country largely depends on oil together with natural gas, in this year as a result of the world economic crisis, the national income reduced by 6%. The approximate daily oil production is between 50,000 and 75,000 which is equivalent to 11,000m3 of oil, in this year the over all sales dropped thus affecting the whole banking and financial sector of the country. Other minor drivers of the economy are construction and real estates, trade, together with other financial services (Staff writer, 2010). The global economic crisis of 2008 had severe effects to the economy of the country. This report analyzes these effects, changes in the banking, and financial industries that were caused by the crisis, major risks being managed by the banks of the country compared to banks of nations like UK and France, the financial position of the country at large, and impacts of debt obligation by Greece (Shehab and Staff, 2011). UAE financial crisis: reasons and effects The current status of UAE banking sector Sky piercing towers, petrol multi-dollars, spectacular and great architectural designs, clean and broad road networks, rotating buildings , among others are the key attractions that great investors, luxury seekers, and international businessmen come to seek in UAE specially in its capital; Dubai. Currently, the country is at a stable economy, in the last few weeks it has issued bonds worth over $1.9 trillion to international investors as an assurance that its economy is quite stable and totally unshakable. But it is quite unfortunate that the same economy has not yet fully stabilized in reference to current reports from the government, the country is not in a position to pay all its out standing debts in the same economic period which is worth over $7,400,000. This declaration has been published in major government institution, to notify the international investors as well as other creditors that it current economic position is not much favorable but according to financial analyst, it may stabilize in a period of six months (Shehab and Staff, 2011). The reason for the economic crisis Dubai being the major state of UAE was severely hit by the crisis compared to the other states. This is because it does not greatly depend on oil as they do; its economy is driven by investments, shipbuilding, tourism, construction firms, and township building. Foreign Institutional Investors commonly abbreviated as the FII are the key drivers of the financial sector of the state, but due to Global economic crisis in 2008, they failed to invest as expected and overall collapsed the economy of the country. This impacted to poor performance of all other sectors in the country especially the banking and the financial sectors which greatly depend on the status of the economy (Staff writer, 2010). On overall, the Arab countries were hit by rapid financial and banking problems in the same year. This was in the first half of 2008, the nations affected were the ones that mainly depend on natural gas, oil, and other petroleum products. The crisis at first favored them because the oil prices increased but in the next few months, the price affected the prices of all other commodities especially foods. These oils producing nations led by UAE are arid areas which fully depends of imported food experienced financial problems, resulting from the high cost of foods and other products. By the month of July in the same year, the cost oil collapsed because of the financial crisis; many oil companies were ready to sell their oil reserves to cover up their expenditures. Hydrocarbon recipients fell, especially in UAE, trade deteriorated and imbalance of payments prevailed. The cost of one barrel oil fell from $130 to $35, by September, world’s stock markets dropped and these led to severe loss in UAE (Staff writer, 2010). Effects of the financial crisis UAE businesses are greatly tied up with those in India among other countries. The projects on going in these countries were delayed, and as a result, the cost incurred increased because the cost of living rose to cover up the crisis. Other projects were prolonged while others were dropped. Unemployment issues hit the country as companies retrenched the workers to reduce their expenditures. Fear of further loss affected investment extent making 47% of the FII to quit investing in the country. Up to date, 70 FII are debtor of the country where the debts have not yet been fully settled as a result of this crisis (Dubai economy set to treble by 2015-ArabianBusiness.com 3 February 2007). The hope of the nation Regardless of the extent of this crisis, financial analyst have researched and proved that it is possible to recover the loss within no time. This crisis is similar to those that hit the country in the year 1999 where interstate’s loans helped in lifting the country’s financial loss. Time quantum in this financial crisis is much severe, stable States such as Abudhabi associates have volunteered to take responsibility for the country’s loans. The state also announced that it would lend the government $1,000,000 to cater for the financial aspects (Mandy, 2011). Changes experienced by bank customers since the global financial crisis Arab banks are not exposed or linked to the USA’s derivatives or mortgage markets; this prevented them from experiencing large losses which would later be felt by the customers through increased bank rates and other related interests. Sovereign wealth holders of funds and other equities experienced large losses. This scared the banks from lending the money and the little that was lent was accessed with very high interest rates because of the risks prevailing in the stock market of the country. Different financial sectors and institutions also suffered because of the fall in the stock market. By February 2008, the stock market of UAE had dropped by 49%; this effect was as a result of the severe losses experienced in Dubai World, which had rendered its stock market dropping by 74%. Other nations in the region suffered the same problem especially Egypt whose economy dropped by 61%. These big losses scared away investors, bank’s lending spirit declined, reduced consumption rates, and investments were discouraged as well (UAE IMF EXTERNAL RELATIONS DEPARTMENT, 2011). Financial position of UAE banks in relation to their lending activity In the last few months, the country has achieved remarkable achievements both locally and internationally leading to the current economic advancements in the region. Oil price decline had shut down the capital market, while the property markets in Dubai World had exposed strains in the economy. Today, different authorities have supported the banking and finance sector through recapitalizations, liquidity injections, and deposit guarantee as Abudhabhi associates helped in the process awakening the economy of major states such as Dubai. Nevertheless, the banking sector is encouraging short term borrowing to facilitate quick recovery of the remaining part f the economy. There is remarkable growth in the real estate market as well as capital market, which are among the key drivers of the financial institution including oil (Mandy, 2011). Main risks being managed by UAE banks today Today, the financial institutions including the bank sector is experiencing rapid growth despite the previous crisis. Keeping in mind that these high oil prices are from the old trading partners, together with the demand that have render the sector’s growth by 3.3% in 2010/2011 fiscal year, regardless of the fiscal construction, and economic growth the banking sector is at a risk. With an exception of World of Dubai, the other states depend on oil (Prasadjain, 2011). Banking sector in Dubai have experience a 3.3 % growth from the well performing sectors which includes: tourism where 44 million tourists were recorded, trade, logistics, large investments from the public all contributing to the balance of payments. Unlike in other states where the balance of payments is met the good performance reflected in the petroleum industry. Despite Dubai’s World efforts to restructure debts, there are uncertainties about debts because Greece offers unfavorable financial lending strategies (Prasadjain, 2011). Comparison of banking sectors of UAE with that of UK and France There is a great difference between the banking sectors in UAE and those in Europe a good example being UK or France. This is because the banks have out sourced all over the world, and therefore hardly affected by regional economic crisis. An ideal example is Barclays bank, the parent company is in UK but it has several ventures almost in every country all over the world thus spreading the risk. Banks in the Arab world tend to be conservative and specialize in their region thus exposing the stability to uncertainties unlike those in France or UK. Banks in UAE should also diversify their activities reach, this is because most banks in the region target the merchants ignoring the common citizens, and this is also one of the reasons that expose the banking sectors of the regions to instability (UAE IMF EXTERNAL RELATIONS DEPARTMENT, 2011). Impacts on the banking sector if Greece defaults its debt obligations Greece is one of the major debtors of UAE; currently the country is targeting to meet the agreements of settling the debts with the country. If Greece defaults the debts, the banking sector in UAE would stabilize in a way, this is because the government would target on the process of completely healing the economy of the nation, other than channeling its little gains from the recovery to settling debts (Greek Daily). Supply of money in the country would increase and therefore the bank rates would drop, thus encouraging investments; both local and international. Greece financing strategies is one of the major cause of poor risk management in the UAE (IMF EXTERNAL RELATIONS DEPARTMENT, 2011). Factors that make render economic recovery difficult and fragile 1) Uncertainty regarding to size and overhanging of large property In Dubai, there is over supply of housing and many unfinished projects. This causes uncertainty in weighing property costs, growth, and investments. There is also fear that Abudhabi associates are planning to increase the supply of housing which is rendering pressure on property market (Paul, 2009). 2) Iran’s international sanctions Iran is one of the major trade partners of UAE, traditionally, it demands the real estates of the country and this could affect the recovery of UAE (Paul, 2009). 3) Greece’s lack of exact financing strategies UAE has an over US$31 billion debt for the fiscal year 2011/2012. Around $5 billion of this debt is in real estate, this exposes UAE to short term risks. Better communication, coherent, well defined, and transparent address to Greece financing strategies will lead to increased lending rates in an already poor performing market. These undefined rates are later used to finance uncertain projects and ultimately exposing the country in more and more risks and uncertainties (Paul, 2009). Conclusion Banking and financial sectors are very sensitive sectors of an economy. Nations should design strategies to ensure that they are less affected by the prevailing uncertainties and changes in the economy as well are the risks available in the country involved. UAE is a country that has faced complicated phases in the process of recovering its economic position after the global economic crisis in 2008 which include unstable economy, poor performance of banking sector as well as poor financing facilities. Greece is the major financer of the economy of the country but its financing strategies tend to expose the country into more certainties and risks. From this report we learn that banking and financing sectors should diversify their reach to reduce being affected by local risks and other instabilities, it also helps in formation of firm roots where it turns to be unshakable. Countries should also target on diversifying their economy to reduce the effects of large losses if one economic sector faces challenges. That is the best way to protect the banking sector as well as ensuring that there is always a balance of payments References Staff writer, (2010).UAE has handled the impact of the global financial crisis - Al Mansoori. Sunday, 28 November 2010 12:10 PM. Available at: http://www.arabianbusiness.com/uae-has-handled-impact-of-global-financial-crisis-al- mansoori-364438.html IMF EXTERNAL RELATIONS DEPARTMENT, (2011). United Arab Emirates─2011 Article IV Consultation Concluding Statement. Retrieved on 22nd November 2011. Available at: http://www.imf.org/external/np/ms/2011/030711.htm Greek Daily: UAE has overcome global financial crisis posted on 10/01/2010. Retrieved on 22nd November 2011. Available at: http://www.uaeinteract.com/docs/Greek_Daily_UAE_has_overcome_global_financial_cr isis/39109.htm Mandy, C., (2011). Global Economic Crisis Hits Dubai. News March 05, 2009. Retrieved on 22nd November 2011. Available at: http://www.voanews.com/english/news/a-13-2009- 03-05-voa28-68772492.html Paul, R., (2009).The Impact of the Global Economic Crisis on the Arab World. Retrieved on 22nd November 2011. Available at: http://www.jewishpolicycenter.org/967/global-economic- crisis-arab-world Prasadjain, (2011). FINANCIAL CRISIS IN DUBAI-REASONS AND EFFECTS92. Retrieved on 22nd November 2011. Available at: http://prasadjain.hubpages.com/hub/FINANCIAL- CRISIS-IN-DUBAI-REASINS-AND-EFFECTS Shehab Al M., and Staff Reporter, (2011). UAE could experience slowdown due to global economic crisis. Retrieved on 22nd November 2011. Available at: http://gulfnews.com/business/economy/uae-could-experience-slowdown-due-to-global- economic-crisis-1.921569 UAE Commercial Banking Report Q4, (2011). Retrieved on 22nd November 2011. Available at: http://store.businessmonitor.com/products/?action=download&type=exec_summary&pro duct_id=725 "United Arab Emirates" (PDF). Retrieved on 22nd November 2011. Available at: http://lcweb2.loc.gov/frd/cs/profiles/UAE.pdf Dubai economy set to treble by 2015-ArabianBusiness.com (3 February 2007). Retrieved on 22nd November 2011. Available at: http://www.arabianbusiness.com/index.php?option=com_content&view=article&id=7297 :dubai-economy-set-to-treble-by-2015&Itemid=1 Read More