Data shows that lending has risen 0.3% in the first five months of this year.
UAE's bank loans shrank 0.1 percent in May from April and customer deposits dropped 0.2 percent, signaling that a “near term” improvement in lending is unlikely in the second biggest Arab economy.
Bank loans in the UAE fell to 1.02 trillion dirhams ($278 billion) in May and deposits declined to $264.3 billion, central bank data posted on its website showed today.
Lending has risen 0.3 percent in the first five months of this year on top of a 2.4 percent increase in 2009, the data showed.
In an emailed note sent on Tuesday, Simon Williams, chief economist for the Middle East, HSBC Holdings, Dubai, said: "Slow credit growth is deepening the pronounced system wide credit squeeze that began in late 2008.”
UAE banks’ loan to deposit ratio remains high, “a strong sign that there is unlikely to be a near-term recovery in lending,” he said.
Credit growth in the UAE has slowed after growing by more than 30 percent annually from 2005 to 2008 as the global credit crisis hurt economic growth, hit loan demand and eroded bank profit. Borrowing costs in the UAE have risen 25 percent since January as banks struggled to attract deposits.
The three month Emirates interbank offered rate, the interest rate at which banks borrow and lend to one another, climbed to 2.34 percent today, its highest this year, from 1.88 percent on Jan. 5, according to data compiled by Bloomberg.
That is higher than the equivalent London interbank offered rate, which stood at 0.54 percent today. The dirham is pegged to the dollar and interest rates here usually track those in the US
The gap between loans and deposits widened to $13.7 billion in May from $13.5 billion in March, the data showed.
Williams said: “Until the loan to deposit ratio falls, banks will continue to bid aggressively for deposits, keeping interbank rates and lending rates higher than in neighboring economies which also maintain dollar-peg currency regimes."For all the latest UAE news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.