The UAE banks landed in a serious liquidity squeeze, after foreign banks withdrew Dh100 billion worth of funds from the local banks placed with them to make quick gains from the much-anticipated de-pegging of the UAE dirham from the US greenback, which did not happen. That move coincided with the global financial crisis that forced international banks to withdraw their surplus funds, deposits and investments from international markets, to boost their shrinking liquidity at home.
The Central Bank of the UAE and the Ministry of Finance in total made available Dh120 billion to the local banks to provide the much-needed liquidity boost. In October 2008, the finance ministry poured Dh25 billion into bank deposits to boost liquidity at banks, the first tranche of the Dh70 billion rescue facility. It deposited another Dh25 billion into banks in November the same year.
“Liquidity is not such a big concern at the moment. The inter-bank rates have been falling for the last eight months, which indicates the liquidity in the UAE’s banking system is improving,” Chiradeep Ghosh, senior analyst at Bahrain-based Securities & Investment Company (SICO) told Gulf News by telephone.
“Another reason why the banks have chosen to pay off their MoF loans is because they were expensive. Every year, the interest rates would have gone up 20-50 bps under the step-up clause, so it made sense for the banks to make an early repayment,” Ghosh added.
In May, the UAE central bank said the country’s banks were in a “good financial position and enjoyed excellent capital adequacy.”-Gulf News