What Does A Drop In Demand For Credit Mean For UAE?

According to recent research, the demand for credit in the United Arab Emirates was in a downtrend during the fourth quarter of 2015. The UAE central bank found that business lending slumped to minus 8.1 in Q4 from plus 9.9 in Q3.

But what does this mean for businesses and the nation as a whole? How have regional and global economics affected business lending? Financial and trading experts IG Dubai explain the consequences of diminishing credit demand.

Current credit demand

The UAE central bank’s survey measured the weighted percentage of respondents reporting an increase in demand for loans (or tightening of credit standards) minus those reporting a fall in demand (or easing of credit standards).

“This suggested a reduced willingness to extend business loans, especially to SMEs (small and medium enterprises), with changes in credit standards suggesting a higher degree of risk aversion,” said the bank in a statement. “This was evident in the reported tightening of credit standards pertaining to all terms and conditions.”

Except for retail and wholesale, demand for business loans decreased in all sectors. What’s more, respondents expect demand for property development, mining & quarrying, and electricity, gas, and water sectors to remain weak in the next quarter too. However, the survey also found that respondents expect the net balance measure to recover to plus 3.5 in the current quarter.

 

The reasons for weaker demand   

 

Not only have small businesses and individuals been shying away from borrowing, banks are also becoming increasingly reluctant to lend money. This is because of a slowing economy, higher interest rates, and dwindling bank deposits amid lower government revenues from the sale of crude oil.

 

“I think it probably is a turning point,” noted Shabbir Malik, a Dubai-based analyst at the Egyptian investment bank EFG-Hermes. “If the oil price does not recover meaningfully, there would be a period where loan growth is likely to be subdued.”

 

Mr Malik also believes that UAE loan growth will slow down to between 4 and 5 per cent in 2016, down from 8 per cent last year.

 

What it all means for businesses and the banks

 

Back in the third quarter of 2015, a survey by the Dubai-based lender Gulf Finance revealed that 13 per cent of SME respondents found it more difficult to raise money. But in the second quarter, no one said this was the case. Therefore, even if businesses are targeting growth this year in spite of uncertain economic conditions, they may struggle to find funding.

 

Then again, banks are finding it harder to collect debt payments too. In fact, United Arab Bank said that it lost Dh272.6 million during the third quarter because of bad commercial loans. The floundering price of oil is also putting more and more strain on financial service firms, with FGB, HSBC, Standard Chartered and RAKBank all cutting jobs in the past six months.

 

Even so, most banks remain profitable despite a slowdown in credit demand. On top of that, the outlook looks set to improve in the current quarter too. However, with speculation rising about another global recession, the economy could turn sour quickly. The picture for 2016 is decidedly mixed.

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