On Monday, the Central Bank of the United Arab Emirates said that it would use new criteria to supervise banks’ exposure to real estate, a crucial sector of the Gulf state’s economy which has been sluggish for years.
The regulator is introducing an “enhanced framework” that will cover all types of on-balance-sheet loans and investments, and off-balance-sheet exposures to the real estate sector, it said in a statement.
This will require “banks to review and improve their internal policies to enhance sound underwriting, valuation and general risk management for their estate exposures,” it said.
Residential property prices in Dubai, one of the UAE‘s emirates, had been falling since 2014 on high supply and weaker demand, forcing construction firms to cut jobs and halt expansion plans, and leading to rises in banks’ bad loans.
But the sector bounced back this year, thanks to a successful vaccination roll-out and an early easing of COVID-19 restrictions, which boosted Dubai’s economy as trade and travel sectors opened up.
The central bank said, “Banks with higher risk-weighted real estate exposure in their portfolios will be subject to a more extensive supervisory review of their underwriting and risk management practices in this segment.”
The regulator will give banks one year to enhance their practices to meet the new requirements, starting from Dec. 30.