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Banks weather the crises.

IT SAYS MUCH FOR the resilience of the banking sector of the UAE that it seems to have successfully weathered both the Kuwait crisis and the collapse of Bank of Credit and Commerce International (BCCI). The BCCI scandal was bound to hit Abu Dhabi particularly hard since the ruling family held 77% of the bank's capital. At the time of its demise, the worldwide financial group was being restructured with Abu Dhabi as its main headquarters. No other responsible banking centre wanted to have anything to do with the increasingly tainted company. When it went under, therefore, Abu Dhabi found itself the target of much recrimination.

Abu Dhabi has plenty of reason to feel highly aggrieved by the affair. It feels that it tried to act in good conscience to restore the damage perpetrated by the bank's fraudulent managers and it has made what it considers to be a generous offer to cheated creditors. The emirate intends to distribute some $1.7bn to depositors (although this covers only creditors of BCCI SA, the Luxemburg holding company, and none of the 140,000 creditors of BCCI Overseas based in the Cayman Islands) but claims that the net outcome of this offer of settlement has been misrepresented by advisers to the creditors. Members of the Depositors' Protection Association, a group of BCCI SA creditors and customers based in London, are vociferously critical of the deal.

In a statement last June, representatives of the Abu Dhabi authorities said "the liquidators estimate that creditors will receive 30-40 pence in the pound as a result of the measures |proposed by Abu Dhabi~, not the 15-17 pence in the pound that some advisers to the creditors' committee have been trying to mislead people with."

In October, an official enquiry into the affair commissioned by the British government was made public after much procrastination. The chairman of the enquiry, Lord Justice Bingham, had especially harsh words to say about the performance of the Bank of England in its role as supervisor of banking operations. It was also critical about Price Waterhouse, who acted as BCCI's auditors. The admonishments follow similarly tough criticisms from the US Congressional enquiry released a few weeks before by Senator Bob Kerrey of Nebraska.

Given the alleged failure of the Bank of England and BCCI's auditors to control the deteriorating situation at BCCI, Abu Dhabi representatives believe that they have been unfairly singled out. They have repeatedly questioned the role of Price Waterhouse in the debacle. The accountancy firm has been accused of facing a conflict of interest due to the number of roles it agreed to play. Ahmed al Sayegh, a director of Abu Dhabi National Oil Corporation (Adnoc) who has been a spokesman for the emirate on the BCCI affair, stated this summer that "Price Waterhouse were financial advisers on the restructuring of the bank to the majority shareholders |Abu Dhabi~ and BCCI itself; auditors; members of the investigation team; and separately -- without informing the bank or its majority shareholders -- they were reporting to the Bank of England." Al Sayegh has maintained that Abu Dhabi will take legal action against Price Waterhouse.

Abu Dhabi is also bitter that the Bank of England acted impulsively and without consulting the emirate at a time when Abu Dhabi was financing the restructuring of the banking group. The widespread impression in the UAE is that the unfortunate BCCI saga would have been dealt with in an entirely different manner in the Middle East. It would have been expensive but discreet.

Locally, Abu Dhabi has handled the BCCI collapse by taking a 40% stake in the bank's local affiliate under the global settlement plan announced earlier in the year. What is now known as the Union National Bank is one of the few entities in the group which could have been made viable. Full financial information about Union National Bank will not be released until a final settlement in the BCCI case is released. At the end of 1990, BCCI in the UAE had assets of almost $1.6bn and was one of the leading trade finance specialists in the federation.

The worst effects of the BCCI collapse should now be behind the UAE. Repercussions from the scandal may have been a contributory factor in rather disappointing results for the banking sector in 1991, although the aftermath of the Kuwait crisis also played its part. At the end of the day, it is probably surprising that local banks have managed as well as they did.

National Bank of Dubai, for example, the country's largest bank in 1990, reported marginal balance sheet growth and an 11.4% fall in profits from the previous year. The National Bank of Abu Dhabi overtook it as the biggest financial institution in the federation, with an 8% growth in assets and a 2.5% growth in profits (see table).
The major players
Top banks in the UAE, end 1991 ($ million)
 Assets Capital Net Profit
National Bank of Abu Dhabi 6,928 482 25
National Bank of Dubai 6,705 957 112
Emirates Bank International 3,022 279 55
Abu Dhabi Commercial Bank 2,788 425 23
Bank of Oman 2,661 244 38
Union National Bank(*) na na na
Arab Bank for Investment and
Foreign Trade 1,231 125 7
Dubai Islamic Bank 1,100 68 6
Abu Dhabi Investment Company 1,047 63 6
* Union National Bank is the reconstituted UAE affiliate of
BCCI for which no 1992 figures are available.

According to the majority of analysts, local banking is hampered by limited local lending opportunities, constraints on the banks' ability to trade in shares, the fragmentary nature of the domestic market, the overhang of non-performing loans in the region and fierce competition among the 18 deposit-taking institutions in the UAE. Banks have also been affected by the steady decline in dollar interest rates which are significant for those banks with a high proportion of their investments denominated in the US currency.

If the UAE can put the BCCI affair behind it, there will be more room to tackle the outstanding matter of bank mergers and rationalisation. The takeover of Middle East Bank by Emirates Bank International at the beginning of the year was an important step forward. The takeover of the ailing firm reduced the number of Dubai-based banks to five.

At the time of the takeover, Middle East Bank had recorded two years of substantial losses, and its assets fell 18% in 1991. Dubai Islamic Bank announced in August that it had exposure of $70m to BCCI and Sharjah's four banks have similar concerns.

But according to Sultan al Suweidi, the governor of the Central Bank who took over last year, as long as local banks can produce good results there will be no undue pressure from the Central Bank for mergers.

"The Central Bank has no right to force mergers," he said in March, "unless it is called upon to provide assistance." But it is generally accepted that the UAE remains overbanked with too many institutions competing for business. The Central Bank hopes that the initiative for regrouping will come from the banks themselves (as in the case of the Emirates Bank International and Middle East Bank). If it does not come fast enough, however, the time may come when the Central Bank must step in.
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Title Annotation:Special Report; Bank of Credit and Commerce International controversy
Publication:The Middle East
Date:Dec 1, 1992
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