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Global Crisis and Banking in UAE

In criticising some UAE banks for their liberal lending policies and their inept response to the global economic crisis resulting in huge losses for the industry, the Dubai Police chief has drawn attention to a problem that has lately acquired alarming proportions. The UAE has had its fair share of issues and problems since the global economic crisis blew up in our face.

With the financial and construction sectors in the UAE — two of the most critical areas of growth for the nation — slowing down, just as the rest of the world has, there have been some job losses and layoffs resulting in defaulting of loans. Apparently, there are so many defaulters that prisons have no room to keep them.

The police chief says this was a crisis waiting to happen as banks had been repeatedly warned that their policy of open-ended lending without restrictions and necessary guarantees could be a recipe for disaster. Of course, it goes without saying the police chief is not far off the mark in his analysis. However, lending is banks’ business. They can’t survive if they don’t. Besides, this is still a young country. Most banks in the country are relatively new players in the field and clearly hadn’t seen the current crisis coming.

In fact, this is a crisis that is not unique to the UAE. The whole world is battling the disastrous effects of the economic crisis.

Even strong and seasoned economies like the US, Germany, France and Ireland are discovering how their banks recklessly lent without ensuring the credit worthiness of their borrowers.

However, there’s a critical difference between these countries and us. They have adequate legal mechanisms and safeguards in place to deal with bankruptcy issues and defaulters. This is what the UAE urgently needs. Banks in the UAE must draw right lessons from the current crisis to help themselves in months and years ahead.

Maybe banks, as Dhahi Khalfan suggests, need to offer a chance to defaulters to re-employ themselves and repay their debts. Also, dealing with such defaulters — most of whom affected by the world economic crisis — according to civil laws could help. In the end, we must be better prepared for the future.