Saturday, May 21, 2005

Three cheers for the Central Bank :: 7DAYS

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Last time it happened, late last year over the IPO of Aldar Real Estate, the authorities let the offending banks off with a slap on the wrist. Not this time. The Central banks has said it will strip the four unnamed banks of interest earned on loans of 228.8 billion dirhams, which it said exceeded their authorised lending levels.

Why does this matter? For two reasons. First, because in any economy, if banks start playing by their own rules, they can end up in trouble - taking down thousands of ordinary individuals and companies with them. The scandal involving the Bank of Credit and Commerce International, which had strong links with the UAE, may be more than 10 years ago. But for the depositors who lost billions of dollars, the memories are still extremely vivid.

Second, because the stock markets in the UAE were in danger of entering bubble territory – fuelled partly by banks lending to investors for stock market speculation. Rumours in both Dubai and Abu Dhabi suggest that some investors have had to sell cars and even houses in recent weeks to repay short-term bank loans used for stock market speculation, after the markets fell about ten per cent in the first week of May. Again, we don’t need to go back too far in the history books to see the damage that a stock market bubble can do to an economy when it bursts (Japan in the 1990s and the US in the early 20th century, to name just two).

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