Global Financial crisis

Global Financial crisis

The global financial crisis had drastic negative effects on many economies worldwide from 2007/08 when the crisis started. It was considered the worst since the Great Depression by many economists. The crisis involved a loss of value of asset prices over a short period of time. It originated from the US following a housing bubble that left many financial institutions such as the Lehman Brothers investment bank in debts due to liquidity shortage. The collapse of the bank spell panic across various investors worldwide. The UAE economy is highly connected to the global economy. As a result, banks in the region and Abu Dhabi, in particular, were not left behind, immediately, they started to sell off their assets in the global market before the prices of their assets tumbled further downwards. The bank fell into great financial losses and it took strategic measures by the government to revamp the economy. In 2010, the government implemented expansionary fiscal policies. The policies involved diversification of the economy from non-oil industries. The First Abu Dhabi Bank (FAB) only came to be in 2016 following a merger between the National Bank of Abu Dhabi and the first gulf bank. It did not exist before 2016. The consolidation of banks in the region id one of the actions taken by corporate leadership to caution them from future crisis especially at this point when the oil prices have been falling. The two banks were among the leading banks in terms of lending in the UAE. In 2017, the financial sector activities accounted for about 9% of the GDP at Abu Dhabi. The leadership came up with several measures including supportive fiscal policies from the government, adopting macroprudential policies, enhanced bank supervision, and enhancing corporate financial disclosure (Khamis, 2010).

The crisis started with a crisis in subprime mortgage lending. Consumers who couldn’t afford the mortgage but lent money for a mortgage even though they were not in a position to repay. The consumers did it for speculative purposes and when the bubble erupted, the crisis emerged. It later affected the banking industry globally. The banks had taken excessive risks which led to the near-collapse of the global banking system. Many consumers and traders were unable to settle their debts. The crisis came to an end following the US government interventions whereby it assisted critical industries in the economy recover from the crisis through various economic mechanisms and huge bailouts. The crisis had a ripple effect and it affected other economies and organizations worldwide because they are interconnected through international trade. Various regional economies like in Europe and Asian markets bore the negative impacts of the crisis as soon as it began in the US. The global financial crisis was actually followed by the European debt crisis. Banks are some of the institutions that were hit hard by the financial crisis. The banks’ leadership took several strategic measures to protect the bank and its shareholders from losing much of their wealth. The crisis was transmitted to the Gulf Cooperation Council (GCC) through the contraction of economic activities worldwide.  The contractions were characterized by financial deleveraging, reduction of asset prices, and the fall in oil prices.

Source: (Khamis, 2010)

Many countries globally adopted Basel III capital and liquid standards. The US came up with the Dodd-Frank Wall Street Reform and Consumer Protection Act as one of the measures to prevent such as the crisis in the future.

In the Gulf Cooperation Council (GCC), the UAE economy had been the second largest. Over the decades, it had transitioned from a poor economy to a wealthy economy with a trade surplus and high income per capita. the UAE economy largely dependent on manufacturing, construction, services, oil, and tourism. before the global; financial crisis, the country’s GDP grew at a rate above 6% between 2005 and 2007. However, the growth rate fell to -4.8% in 2008 before recovering in 2009 going forward. The trend is a good indicator of how the UAE is highly connected to the global economy and the effect of the global financial crisis in the country. Financial institutions were deeply affected and made huge losses in the UAE. The economy slumped from the third quarter of 2008. It highly relied on oi and tourism which were hit hard. Countries that import oil from the UAE were in crisis too and they had reduced their oil imports. The aggregate demand for exports from the UAE had fallen and oil prices were highly unpredictable.

The banks reflected the condition of the UAE’s economy which was declining during the crisis. In 2007, the GDP growth rate was 6.6% but it fell to 5.3% in 2008. The level of consumption in the UAE had dropped significantly and foreign investors, as well as expatriates, left. Following the expansionary policy by the UAE in 2010, the banks started to recover. In 2010, the economy grew at 1.3% and 4.9% in 2011.

The banks in the UAE are highly integrated into the financial market globally. Due to the connectivity, the country’s banking sector suffered adverse effects which were contrary to the period before the crisis.  The clients and banks could no longer access funds from the traditional markets in the UK and the USA. Many financial institutions from the west were struggling. Therefore, banks from the GCC could not access credit easily. For example, from 2005 to 2007, loans and deposit uptake grew at 30% and 27% annually but the trade reversed during the global financial crisis. The rate of loan default rose significantly. The non-performing loans as well were increasing owing to the reduction in economic activities in the UAE. The prices of real estates also declined thus discouraging investors from making new constructions.

Source: (Khamis, 2010)

Before the crisis, there was a boom associated with construction and real estate. The banks reacted by increasing their rate of interest to take caution against the high risks during the period. Many investors deferred or broke their loan contracts. Even though the government could lend money to banks in the UAE. However, there was a lot of anxiety in the country as some investors left the country while others arrived seeking a haven to invest their wealth.

Source: (Khamis, 2010)

The ongoing consolidation of banks in Abu Dhabi is an attempt to increase the banks’ liquidity. During the global financial crisis, the government-funded banks in Abu Dhabi and this kept them afloat despite the fluctuating oil prices such that they can operate in very competitive markets. The merger between the National Bank of Abu Dhabi and the First Gulf Bank is a good action taken by the leadership of the bank to strengthen them and caution them against any crisis in the future. Notably, the prices of oil have been falling it is the biggest source of revenue in Abu Dhabi hence calling for the need for financial institutions in the region to restructure. Several structural reforms have been made in the banking sector since the 2007-08 crisis. Many banks and other financial institutions are fragmented because they are family-owned and focus on the regional economy. Such banks were less affected by the crisis because they target the local markets which are less integrated to the financial markets globally. The Central Bank of the UAE has various legislations, policies, and regulations meant to ensure that the banks comply with international banking standards and also ensures that they have proper liquidity. The reforms by corporate leadership has boosted the banks’ efficiency and enhanced self-reliance. They are also meant to reduce the economy from relying on the government too much.

Roundtable on effective and efficient financial regulation in the MENA region by may Khamis

The impact of the global financial crisis on the GCC region: Lessons and reform priorities by may Khamis

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Khamis, M., 2010. The impact of the global financial crisis on the GCC region: Lessons and reform priorities. Roundtable on ‘Effective and Efficient Regulation in the MENA Region’. December 6e7, Doha, Qatar.