Abu Dhabi bill payments would create "more liquidity"

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First Gulf Bank (FGB)First Gulf Bank (FGB)

"If payments are made within 30 days, you can see that same dirham go around 12 times in a year. The whole economic cycle would improve."

Abu Dhabi owns about two thirds of FGBFGB, the UAE's largest bank by market capitalisation after its stock rose by 75 per cent last year. Private companies typically have between 60 and 90 days to pay their suppliers, but cash-flow problems associated with the economic downturn have caused payment periods to lengthen.

Late payment is particularly prevalent in the construction industry, where billions of dollars are owed to contractors on stalled projects. FGBFGB has encouraged its customers to change their contracts to require payment within 20 to 30 days.

"A more efficient payment system would trigger much more liquidity. This is all about abiding by the terms of the contract and trying to pay on time. There is no need for the Government to inject new money into the economy." One of the country's key interest rates, which is often used as a reference point for lending, has steadily risen in recent months after coming down from last year's highs of more than 4 per cent.

The three-month Emirates interbank offered rate (Eibor), the rate banks charge each other for 90-day lending, was fixed at 2.2 per cent today, up from a recent low of 1.8 per cent. Economists and bankers alike have been calling for government measures to increase the amount of money in the financial system. Suggestions include infusions of cash and finalising a government bond guarantee scheme.

Much of FGBFGB's business is corporate lending and project finance to the Abu Dhabi Government, quasi-governmental institutions and the private sector. Despite a tripling of provisions in the fourth quarter, the bank bucked the general trend of losses, reporting a 10 per cent increase in net profit for last year.

By Uta Harnischfeger

© The National 2010