Al Hilal Bank Case Study

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The banking market in the UAE at the time Al Hilal was launched was dominated and controlled to a substantial extent by foreign banks. There were fifty banks in the UAE that held assets of $336 billion, the top three banks had 30 percent. The share of UAE banks in the Arab countries was high. The environment when Al Hilal was launched was such that investors were speculating that UAE would unpeg its currency from the US dollar. When compared to other countries the banking industry in the UAE was competitive. The environment was such that the UAE's economy was growing, The growth of the economy meant a higher demand for banking services. In addition, the growth of the economy would have been thwarted if the growth was not supported by the banking sector. Most importantly, 50 banks in the UAE were foreign owned. This meant that these banks had objectives of their own. Their purpose was not to support the growing economy of UAE but their purpose was to achieve their financial objectives. The banking envirionment was such that National banks in the UAE outperformed the foreign banks. The National banks understood the needs of the country's customers. In addition, they followed the cultural requirements of Islamic banking. The National banks had aligned their objectives to those of the the county's growth objectives. The growth in the UAE banking sector occurred because credit was extended to individuals and private enterprises. Credit was extended to these entities by national banks because they were familiar with the norms and practices of lending in UAE. Some of the largest demand from credit occurred from construction boom and real estate investments. These required immediate credit. Delay in releasing credit to this sector meant delay in the growth of the economy. The banking industry in the UAE was healthy before the launching of Al Hilal. Until, 2008, the UAE's banks were performing very well they were lending to the construction and real estate industries. They were also booming because the incomes of the people were increasing. Individual and business related borrowing was booming. The economic growth had other effects. In the years before 2008, the population of UAE increased from the influx of workers in the construction, trade, and financial sectors. With the onset of the global credit crunch and the beginning of the financial crisis in 2008, the financial institutions began to reduce their lending to real estate and residential building. Their rationale was conservatism and they did not want unnecessary exposure. Their restraint was driven by the faltering of US and European banks.
The economic background in which Al Hilal was launched was that the UAE Central Bank estimated that credit growth would fall from 50 percent in the first half of 2009 to just 10% in 2009. The Central Bank had the challenging task of sustaining growth and increasing the investment in real estate. The Central Bank did not want that infrastructure development should slow down. In an action to stem economic slowdown Sheikh Mohammed bin Rashid Al Maktoum, the prime minister of UAE and Dubai ordered the transfer of AED70 billion to the Ministry of Finance. This finance was provided to increase liquidity in the market. It was designed to inject funds into the banking sector and was designed to act as a stimulus. These funds had conditions attached to it such as limited the growth of the their assets, stopping the financing of new real estate projects, and limiting lending to existing project and infrastructure, and channeling funds towards trade and self-liquidating assets. Sheikh Mohammed bin Rashid Al Maktoum, had learned lessons from the US and European banking failure. He did not want that UAE should suffer because of toxic assets. He did not want that banking in UAE should flounder because of real estate depression. He did not want banking money locked up in unattractive infrastructure projects that had a long gestation period.
In 2008, the effect of global banking crisis was felt in UAE. Lloyds TASB stopped giving loans for apartment purchases and reduced loan to value ratio. HSBC increased the minimum salary requirements for a personal loan from AED10,000 to AED20,000. These measures had a negative effect on the economy of UAE. The banks were turning conservative and were thwarting economic growth in the UAE. The impact of foreign banks had to be mitigated by the Central Bank in UAE. The borrowers in the UAE had a positive history of borrowing money. The stringent criteria faced by them hamstrung their business. Also, the UAE banks ...