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Thursday, 23 October 2008

UAE banks under pressure to merge for their survival

The UAE's banks are coming under pressure to merge to create groups large enough to survive any financial crisis.

Experts cite EmiratesNBD, which was created by the merger of Emirates Bank and the National Bank of Dubai (NBD), as an example. It has become one of the UAE's largest banks in terms of capital and the Middle East's biggest bank in terms of assets.

"Although the UAE's banking sector is strong and has large reserves, it is necessary to think seriously about merging national banks, especially as many of these banks are small," said financial expert Ziad Al Dabbas.

"A merger gives any economic entity – a bank, finance institution or insurance company – the ability to compete, give new products, expand in local and overseas markets, acquire state-of-the-art technology, bring in skilled staff and reduce operating costs.

"The UAE and the whole Middle East are going through a phase of expansion and development. This requires high levels of funding from banks for projects. This cannot be achieved without mergers among national banks so they are able to meet the requirements of the market and their clients."

Al Dabbas said the merger of Emirates Bank and NBD had created a group with huge deposits and assets.

He urged the chairmen and CEOs of UAE banks to give up their individual privileges and social prestige to help safeguard the national interest and create strong banking entities that will benefit the sector.

Sulaiman H Al Mazroui, General Manager, Corporate Communications and Community Relations, at EmiratesNBD and a member of the Board of the Union of Arab Banks, backed the call for more mergers.

"If two banks or other financial institutions merge they are able to increase their resources and create a strong entity. However, a merger should be well planned in terms of the number of employees, banking operations, electronic systems and commitments. In addition, a merger should not take place for sentimental or political reasons.

Dr Ahmed Al Janahi, Deputy CEO of Noor Islamic Bank and Noor Islamic Group, said mergers of small banks were a good idea irrespective of the global crisis.

"It is possible that Al Noor Bank will merge with another one," he said. "But the idea is not being discussed currently as the bank is new and enjoys a paid capital of Dh3 billion and a huge investment portfolio of Dh18bn."

Al Janahi said 48 banks were operating in the UAE – eight Shariah-compliant ones and 40 conventional banks.

"As there are around 25 foreign banks in the UAE there is an urgent need for mergers of UAE national banks," he added. "In addition there is a possibility that UAE national banks will acquire stakes in foreign banks."

Al Janahi said it was important that there were no restrictions on mergers in the banking sector and that other financial companies such as insurers and mortgage providers should also be allowed to merge.

Mahdi Kazim, General Manager, Large Corporate Unit, EmiratesNBD, said the merger option should have been available to national banks years ago.

"Mergers create groups with large amounts of capital and reserves," he said, adding that the UAE Central Bank should support mergers.

Dr Maabad Al Jarhi, President of the International Association for Islamic Economics, said the eight Shariah-complant banks in the UAE did not need to merge as they each had more than Dh1bn of capital. He said the most pressing issue that Islamic banks faced now was the existence of "products with a bad reputation", which he said created suspicion.

"Some Islamic banks appoint people who are not qualified to give Shariah-compliant opinions," Al Jarhi said.


WRONGLY TACKLED

The global financial crisis is the result of a unique series of events and is being tackled in the wrong way, said Dr Maabad Al Jarhi, President of the International Association for Islamic Economics.

"The problem began when property finance was given to landlords," he said.

"Due to the greed of the banks the properties were refinanced on the basis of exaggerated valuations. That encouraged people to take more loans.

"Because the liquidity that became available was not used productively, people were unable to repay the loans. Meanwhile, the banks insured the mortgages with insurance companies, which agreed to guarantee the mortgages as they thought only a small number of borrowers people would be unable to repay the loans. In fact the majority of people could not afford to repay.

"Instead of supporting the borrowers who were unable to repay the loans, the money provided by the US government went to the banks so that they would not have to go bankrupt."



AMLAK-TAMWEEL MERGER TALKS ON

Amlak Finance and Tamweel are continuing their merger talks and have begun consulting key stakeholders including the Investment Corporation of Dubai (ICD), which is representing the Government of Dubai.

All key stakeholders have reaffirmed their strong support for a combination of the two property finance companies.

Observers say a merger would create a stronger entity that would be able to attract more business both domestically and in the region while continuing to deliver value to shareholders, the Government, the local economy, customers and employees.

A combined company would be better positioned to drive growth in an attractive and under-exploited segment of the market.

Given the strategic importance of the combined entity to the Emirates economy the two companies are working closely with government authorities to arrange access to liquidity and funding alternatives.

Details of these arrangements will be announced shortly.


SYSTEMS AT FAULT

The global financial crisis was not caused by weak banks, says Abdul Muttalib Mustafa, General Manager of the Oman Insurance Company.

Systems were at fault as the crisis involved giant financial institutions.

"This means that having large institutions does not guarantee there will be no crisis. The benefits of a merger should be established before a deal is completed."

(Emirates Business)

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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
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