Liquidity improving within the banking system

Though the days of easy credit are a distant memory, there is evidence that liquidity is improving, as the economy emerge from the shadow of the financial crisis.

Since autumn 2008, bank lending almost froze and starved companies of much needed facilities to repay loans and meet their short term obligations. But recently, there are  signs that the money supply is increasing – a positive development for borrowers and lenders.

According analysts from the Egyptian investment bank EFG-Hermes, liquidity is easing, as EIBOR is declining and this is reflective of less tension in the monetary system.

Three month EIBOR (Emirates Interbank Offered Rate) on interbank loans in UAE is a measure of liquidity. Recently it has fallen over two percent to 2.46 percent from a peak of 4.78 percent last November, and nearly one percent since the start of April, according to Standard Chartered’s recent report.

The liquidity has improved significantly and it is expected now gradually to filter into the non-banking system, into the trade finance and into longer term lending.

A return of liquidity to the system and an easing of banks’ loan criteria, is matched by a postive outlook for UAE’s economy as oil prices rise and the stock markets gradually improve.

From a low of around $33 in the last quarter of 2008 crude oil prices have recovered to around $65 a barrel; the Dubai Financial Market (DFM) has gained 34 percent since the start of the year, according to calculations by Standard Chartered.

Meanwhile, various government interventions have helped to recapitalise banks’ balance sheets. The UAE central bank injected AED70bn ($19bn) into its financial system in October 2008.
The reluctance of banks to lend in recent months has left them with healthier loan-to-deposit ratios, as slowdown of the credit growth became a global trend. Banks are assessing the quality of their existing assets and their own funding base as part of a credit cycle everywhere in the world.

While growth of deposits in the banking system is increasing, still the flow of liquidity back into the economy is very slow due to lack of risk apettite and confidence. Banks have funds and they are building up assets that they estimate as a lower risk than lending to the private sector. This is creating pressure on the financial system with liquidity flowing in, but not able to get out.

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