The data shows that deposits in UAE banks for three-month terms reached AED 659.01 billion (approximately $179.5 billion) by the end of May 2024. This marks a substantial rise in short-term deposits as savers look to capitalize on higher returns. Resident deposits in UAE banks have seen a remarkable 16% year-on-year growth, totaling AED 2.4 trillion as of March 2024, while non-resident deposits also experienced a modest increase, climbing by 3.5% to AED 221 billion.
Private sector deposits have been the fastest growing segment, expanding by 20.4% to AED 1.7 trillion. This trend is largely attributed to the UAE’s banking sector offering competitive interest rates in response to the US Federal Reserve's rate hikes, which have kept the benchmark interest rate at a 23-year high of 5.3%.
The UAE dirham’s peg to the US dollar means that the country's interest rates closely follow those of the United States. As a result, the rising rates have encouraged savers to park their money in banks to earn better returns, after years of low-interest environments. The weighted average cost of deposits in UAE banks rose to 2.6% in March 2024, a 0.4 percentage point increase from the previous year. Meanwhile, the average yield on lending climbed by 0.5 percentage points to 6.8% over the same period.
Despite the higher borrowing costs, which typically dampen loan growth, UAE banks have managed to sustain credit growth, with gross credit increasing by 8% to AED 2 trillion over the 12 months to March 2024. However, government borrowing fell by 12.8% during this period, while loans to government-related entities saw a sharp rise of 21.4%, reaching AED 298 billion.
The UAE's banking sector has also demonstrated resilience, with provisions for loan losses declining by 3.2% year-on-year to AED 37 billion as of March 2024. This indicates that banks are managing their risk portfolios effectively, even as the economic environment becomes more challenging due to higher interest rates.
The influx of deposits is expected to provide UAE banks with more liquidity, enabling them to offer more competitive rates and products to customers while maintaining their profitability. This trend also reflects broader confidence in the UAE's financial system and the country's economic stability.
As the global economic landscape continues to evolve, the UAE banking sector remains well-positioned to navigate the challenges posed by rising interest rates and changing market conditions. With continued growth in deposits and a stable credit environment, UAE banks are set to play a crucial role in supporting the country's economic development in the coming years.