Covid-19 and the banking ecosystem of UAE

By Hassan Ali Mansoor

Like a raging bull, Covid-19 has swept through the world. Besides infecting millions of people and resulting in the killing of hundreds of thousands of people, it has also brought the global economy to a standstill and disrupted existing projections of capital markets and cash liquidity.

Banks and financial institutions have been forced to review their existing policies and projections, governments around the world have offered stimulus packages to business to remain afloat, and a sense of panic has gripped global markets. In the new normal we see during Covid-19 , we are witnessing an environment where the way work is completed, how consumers bank, how employees learn new skills and how brands are perceived have all changed. And perhaps forever. The degree to which these changes take root will be driven by business and societal dynamics as well as how long it takes to move to a new equilibrium.

Amidst all the uncertainty and challenges presented by Covid-19, UAE can once again hold its head high as one of those very few countries that has not only taken concrete steps to contain the spread of the pandemic but also taken positive steps to sustains its economy and ensure the betterment of its people.

The banking sector of the UAE too has all the reasons to stay optimistic this year.

To recall, 2019 was a year of relatively good progress for the UAE banking sector. As always, the Central Bank of UAE proved to the crucial pivot for private banks. It assisted private banks through its progressive policies that led banks to establish a broader footprint and adopt good international practices.

Lately, the UAE Central Bank has observed that it is still too early in the day to gauge the extent of the impact that Covid-19 will have on the UAE economy. However, the Central Bank has once again assured the private banks that it remains committed to ‘intervene and help effected businesses’. The Central Bank governor Abdulhamid Saeed is reported to have said that the banking sector is well positioned to manage the substantial stress situation and uncertainty in economies caused by the COVID-19 pandemic.

It is important to note that this is not just rhetoric. The UAE government has extended support to businesses impacted by the pandemic and this has enabled businesses to stay afloat in a time of credit crunch. Moreover, this assistance was also given to the banks and financial institutions. In April this year, the UAE gave a whopping AED 256 billion stimulus package to banks and financial institutions that enables them to ‘provide loans, defer borrowers’ debt payments. Fitch said that the recent measures by the Central Bank of the UAE to increase maximum loan-to-value ratios and to allow real estate lending up to 30 per cent of total loans may increase banks’ asset quality vulnerability to falling real estate prices.

Nevertheless, UAE Central has rightly cautioned that 2020 will present an extremely stressed environment in which the role of the banking regulator will be critical in facilitating financial stability and consumer protection. He has also confirmed that the Central Bank will “re-assess its strategic priorities and play a vital role to address these issues… in a proactive and progressive manner.”

Another reality that banks will need to come to terms with is increased M&A activity. Despite the financial assistance and support offered by the Central Bank, not all banks and financial institutions will be able to sustain in the long run. One can therefore expect to see a wave of mergers and acquisitions among banks, particularly among banks with weaker franchises, those with deteriorating business conditions in retail and wholesale trade, and the real estate and construction sectors. UAE banks can improve their uptake with a more widespread increase in digital penetration and change in overall consumer behavior.

Whilst the Central Bank as the Regular will continue to support banks and financial institutions, they too must think out of the box and make opportunities out of this crisis. The patterns of social behavior and interaction have changed during the last three months of the lockdown. Social distancing will drive up the demand for digital banking services. It is time that the banks too adopt and/or improve their existing online banking, mobile bank transfer and e-wallet services for contactless payments.

Given that digitalization has been on an upward trajectory in the UAE, this must be made into a permanent trend, beyond the pandemic because the patterns of social interaction developed during the pandemic era will be likely to continue in the future as well.

Analyses of last four financial crises and 16 market crashes in last 100 years has shown that financial industry got a positive opportunity each time. We are likely to see the same pattern this time as well. It is possible that banks may cut down on costs by retrenching employees but also not reopen branches closed during the pandemic. Some banks would do well to look at moving into cloud, because their data servers and application servers would be on cloud. If this is the case, cloud providers will take the responsibility of securing their environment because globally they are doing this and they will have lot more resources. This way banks can shift their risk to cloud service providers so that they can focus on core banking business and security and data center are taken care by somebody else. This will be akin to an outsourcing of functions to reduce cost and become more efficient.

There is an opportunity in every crisis. Covid-19 is an unprecedented opportunity for decisive private banks that wish to right-size branch networks, optimize the digital experience, and establish sustainability credentials, thus emerging in a stronger position. More than ever before, this is time for the ‘survival of the fittest’. Private banks that adopt a more considered and strategic response will emerge victorious and be able to not only sustain themselves but progress at a time when many other institutes are in a panic mode.

The author is a banking professional with more than 15 years of banking experience. He can be reached at : h_a_m23@hotmail.com