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FTA with USA to boost banking sector efficiency

Liberalisation will bring greater and more intensive competition among banks, both local and foreign, as large global players will emerge on the scene. In line with this context, DCCI has carried out a research to assess the impact of the UAE banking sector within the framework of liberalisation of the UAE-USA FTA.

Structure of UAE & USA Banking Sectors

The banking sector is one of the healthiest sectors of the UAE economy. The number of commercial banks in the UAE has been rather steady at 46 banks over the period 1999-2004. The number of branches has increased by 25 per cent during the same period, to reach 449 branches in 2004. Employment in UAE banks witnessed a 35 per cent increase over the period 1999-2004 to reach 19,288 employees in 2004. Moreover, total assets of UAE banks stood at $122.5 billion in 2004, increasing by 78 per cent since 1999.

On the other hand, the number of banks in the USA has been declining since 1999, and has dropped by 11 per cent in the last six years (i.e. from 8,580 banks in 1999 to 7,630 banks in 2004). Employment was estimated at over 1.8 millions, with a 9.4 per cent increase over the period 1999-2004. Total assets of USA banks amounted to $8,413 billion in 2004 with an increase of 46.7 per cent over the same period. These figures reflect the huge size of the USA market compared to that of the UAE. Therefore, it should be concluded that the number of branches in the USA has been steadily increasing over the same period by over 8 per cent to reach 68,949 branches in 2004.

The observed trend in the USA banking sector shows that as consolidation of banks into fewer and larger ones is taking place, an increase in bank branch networks are generally associated with lower expenses, higher fee income, and higher profitability. This means that the USA banking sector is undergoing a serious reform that endeavours more economies of scale and efficiency, very much in line with the international trend. The latter is resulting in even more challenges for the UAE banking sector. Moreover, it is of relevance here to note that the number of banks and branches in the UAE is expected to increase upon liberalisation by means of entry of new foreign players. Such an expansion could be explained by the fact that banks will then be subject to market forces, rather than to the current UAE Banks’ Federal Law.

UAE local banks as targets for USA banks

In the last five years, profitability of UAE banks exceeded that of the USA. Consistently, high ratios of return on assets and return on equity, along with a high ratio of non-performing loans, will make the UAE banking sector more attractive to USA banks. The latter would seek to enter the UAE market enjoying high profit rates and capitalise on improving non-performing loans through modern management in addition to exploiting untouched opportunities in diverse economic sectors. Therefore, UAE local banks must benchmark themselves against the world’s best performers and catch up with international banking practices.

At macro level, banks thrive with business and consumers confidence. Higher confidence is achieved through market transparency. However, enforcement of sound regulations and monitored competition policies are pre-requisites as well. The role of the government in this respect is crucial. The more the financial market is growing, the more sophisticated regulation and monitoring it requires. International standards are the guidelines in this respect. The sooner the local financial market will achieve the level of international markets the earlier it will get integrated and the easier it will be for the banks to play leading role in tapping from local, regional and international financial markets.

Finally, the forthcoming FTA with USA is expected to improve efficiency of the UAE banking sector by inducing competition and opening opportunities to new players. For the consumer, it entails better and cheaper services and consequently higher consumer surplus.