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Declining rate spreads, pressure from competition challenge banking sector

But on whether the banking sector is over banked, the report’s findings are non-committal. It states: “If it is over banked, any expansion policy is likely to erode profitability and potentially prompt financial instability in the market. However, if banks still find it a good investment to operate their offices, then the UAE is now under banked.”

In December 2007 — the time at which the report was written — there were 47 commercial banks and nine representative offices. (Since then Noor Islamic Bank has opened its doors and Ajman Bank has announced it will be open for business later this year). According to NBD, the extent to which the banking sector will open up and banks’ operations be expanded will depend primarily on two factors: the commitment made by the UAE to open up the market under the WTO and other FTAs; and the profitability of banks and the impact of competition on financial stability.

NBD report notes that even though there is a general belief that the UAE is over-banked and it has itself merged with Emirates Bank, it “need not necessarily be a marker of an over-banked market. It states: “Declaring a market as over or under banked is not an easy task, especially in a dynamic environment where the macroeconomic fundamentals are changing rapidly.”

The current trend in the banking sector of overcapitalisation, weak growth, increased accountability and adjusting to a more open market — which is required to meet international trade obligations — “are the harbingers of true competition and challenges,” NBD says. It adds that banks may have to compete “not only for lending driven interest income but also for non-interest income through innovative delivery of financial services”.