Impact of Global Financial Crisis on UAE’s Banking Sector

Running Head: IMPACT OF GLOBAL FINANCIAL CRISIS ON UAE’S BANKING
SECTOR
Impact of Global Financial Crisis on UAE’s Banking Sector
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1IMPACT OF GLOBAL FINANCIAL CRISIS ON UAE’S BANKING SECTOR
Abstract
The report discusses the impact of global financial crisis of 2008 on banking sector of UAE.
The middle east nation, UAE is one of the wealthiest nation. The nation current has a strong
financial sector with presence of various domestic and foreign banks. The financial crisis was
originated from sub-prime mortgage crisis in United State and gradually spread across
different nation. UAE because of its relatively less connection with European world was
expected to be less affected from the crisis. However, in reality the banking and financial
sector severely affected from the crisis hit. During this time central bank of UAE provided
different stimulatory packages to rescue the domestic banks. The banking sector in UAE is
still in the phase of crisis recovery.

2IMPACT OF GLOBAL FINANCIAL CRISIS ON UAE’S BANKING SECTOR
Table of Contents
Introduction................................................................................................................................3
Causes of crisis outbreak............................................................................................................3
Impact on UAE’s banking sector...............................................................................................4
Pros and Cons of banking sector................................................................................................5
The demand and supply scenario...............................................................................................6
Production and cost structure.....................................................................................................8
Market structure and strategies of various players.....................................................................8
Moral Hazard and UAE government intervention...................................................................10
UAE banks regulation after the GFC.......................................................................................11
Recommendation to overcome crisis in future.........................................................................12
Service/Product efficiency...................................................................................................12
Allocative efficiency in Banking.........................................................................................13
Corporate Social Responsibility (CSR)...............................................................................13
Other recommendation.........................................................................................................14
Conclusion................................................................................................................................14
References................................................................................................................................16

3IMPACT OF GLOBAL FINANCIAL CRISIS ON UAE’S BANKING SECTOR
Introduction
UAE’s banking industry is quite fragmented in nature. At present, the industry
consists of 23 domestic and 28 foreign banks. The banks integrated in Dubai and Abu Dhabi
enjoy the lion share in total domestic assets. The key features of UAE banking industry
include concentration in deposits and loans, high proportion of exposure to the related party,
availability of limited data transparency, and intense competition in the industry. The
performance of UAE banking industry is aligned to the performance of real estate and
construction sector (Zarrouk, El Ghak & Abu Al Haija, 2017). The banks though strong
connection with local government but the concerned sector has limited diversification and
show concentration in relation to geographies, customers and products.
During global financial crisis, like other GCC countries UAE affected significantly
through financial and trade channels. The common symptom of increased risk was seen in
high growth of credit, boom in property market and large inflow of capital. The funding of
banks significantly disrupted during this time. Countries like UAE experienced a reversal of
speculative inflow of capital. This in turn constrained liquidity condition affecting confidence
of investors (Ashraf, Rizwan & L’Huillier, 2016). The problem further aggravated with
collapse of Lehman Brother in September 2008. With this, the financial imbalance had
become more evident in United Arab Emirates (UAE).
The banking sector of UAE is relatively less exposed to Europe. The foreign liabilities
of UAE banks are only 19 percent of total liabilities. Having a relatively small size of
European subsidiary, the effect of financial crisis was projected to be moderate (imf.org,
2012). However, the crisis transmitted to UAE financial sector through various channel
leading to a decline in equity return, increase in Non-Performing Loan and crisis in financial
crisis.
Causes of crisis outbreak
The global financial crisis that had begun in July 2007 was primarily caused by a
sudden credit crunch in US financial market. During this time, any US investors lost their
confidence in the subprime mortgage value causing a liquidity crisis in the economy. The
origin of the crisis was found in deregulation initiated in financial market. This allowed banks
to involve in hedging fund in terms of trading with derivatives (Rey, 2015). The recession
occurred in 2001 hardly hit US banks welcoming new derivatives. To counter the crisis, the
Federal Reserve lowered the fund rate to 1.75 percent. The fund rate again lowered to 1.24