Drop in UAE monetary supply poses challenge for banks

Drop in UAE monetary supply poses challenge for banks | AGBI
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May 13, 2026
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Banking & Finance
Drop in UAE monetary supply poses challenge for banks
By Matt Smith
May 4, 2026, 3:54 PM
Shutterstock/Alexander Chesarev
Commuters and visitors at DMCC metro station in Dubai. The Iran war has hurt important economic sectors such as tourism, which in turn affects UAE banks
Deterioration began in early March
Large buildup of withdrawals
Financial stability maintained
Rising interbank lending rates and a declining monetary base indicate the UAE banking system is under strain, economists have said, with the central bank likely to intervene again to help lenders.
The US-Israeli war on Iran , which started on February 28, has hurt important UAE economic sectors such as aviation, tourism, energy and consumer-focused industries, which in turn affects banks.
The monetary base – known as M0 and including the currency in circulation and commercial banks reserves held at the central bank – began to deteriorate in early March, an Oxford Economics report states.
This process accelerated as the war intensified so that M0 had fallen by AED74.6 billion ($20.3 billion), or 8.2 percent, on March 30. That would equate to an unsustainable 152 percent on an annualised basis.
A decline in M0 indicates households or companies are withdrawing cash from the banking system, from the system overall, said Azad Zangana, head of GCC macroeconomics at Oxford Economics in Dubai.
That tends to happen at certain points in the year during Eid or festivals, but its normally small whereas there was a very large buildup of withdrawals over a 30-day period that became quite concerning.
UAE central bank data on commercial banks deposit levels is available up to February. Total deposits reached a record AED2.94 trillion that month, of which AED2.1 trillion was in dirhams and AED847 billion in foreign currencies. The March data will be published in mid-May.
About AED1.7 trillion was held in accounts that could be withdrawn immediately and AED1.24 trillion in interest-bearing time deposits that can be accessed only after an agreed period without incurring financial penalties.
Its likely that withdrawals by people leaving the country have contributed to M0 declining, said Zangana. It could also be a sign that people are losing jobs or theyre not earning enough, so are drawing down on their savings.
Foreigners on average represent 13 percent of the populations of high-income countries, whereas the figure for the UAE is about 74 percent, according to Oxford Economics.
That makes the UAE more vulnerable to money outflows, said Zangana.
In 1990-1991, deposits in UAE banks declined by 15 percent following Iraqs invasion of Kuwait, according to Giyas Gokkent, chief economist at Bahrains Arab Banking Corporation.
The Iran war is unlikely to have sparked outflows of a similar magnitude, he said.
Nevertheless, sizeable deposit outflows could cause financial conditions to tighten and there could be fiscal costs, said Gokkent. Whatever happens, the large external assets of the UAE could shield the economy from volatility caused by outflows.
Interbank lending costs
The Oxford Economics report also pointed to a clear sign that ongoing withdrawals of capital were exerting stress on the banking system – the spread on the UAEs three-month interbank lending rate (known as EIBOR) versus the US overnight swap index more than doubled in March.
EIBOR determines UAE borrowing, so a rising spread indicates tightening domestic liquidity and higher relative funding costs in the banking system.
In response, the central bank launched what it described as a comprehensive package to reinforce the stability and resilience of the UAE banking sector in mid-March.
The initiative includes making extra liquidity available to banks and a temporary relaxation of certain rules, said Gokkent. This helped M0 rebound somewhat but it has since retreated again.
Financial stability has been maintained and stresses on banks have not mounted, said Gokkent. These are measures intended to mitigate the impact of adverse external shocks.
Further reading:
US asset manager has loaned $10bn to Gulf investors during war
UAEs top banks boost provisions as Iran war clouds outlook
Trump says US mulling UAE currency swap
Zangana said a prolonged period of elevated EIBOR spreads posed a problem for banks.
Thats why it was so important for the UAE central bank to inject liquidity, he said. It probably wont be the only time this year that it does so.
Zangana described a mooted dirham-dollar swap arrangement between the UAE and the United States as precautionary.
Its better to have that in place before you need it so that you dont need it, he added. This isnt a case of bailing the country out. The UAE still has a huge amount of reserves and foreign-denominated assets.
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