UAE banks appear to be maintaining a cautious approach towards mortgage credit as loans to the real estate sector slumped by nearly Dh1 billion in the first quarter of 2012 to extend a decline through 2011.

Official data showed total mortgage credit provided by the country’s 23 national banks and 28 foreign units shrank to around Dh160.8bn at the end of March from Dh161.5bn at the end of 2011.

Mortgage loans have already dropped by about Dhtwo billion through 2011 to reverse a steady growth over the past few years despite the 2008 global fiscal distress, showed the figures by the Central Bank.

A monthly breakdown showed mortgage credit remained unchanged through January before recovering by around Dh700 million in February. But it receded in March to indicate banks are still reluctant to lavish credit as they did before the crisis, when general lending was racing by at least 30 per cent annually.

Mortgage loans in the UAE, the second largest Arab economy and a key OPEC oil producer, slowed down in 2009 compared with 2008 as banks maintained their tight credit policies and chopped close to Dh13bn off their balance sheets for bad debt, according to the central bank.

Poor investors’ confidence because of a general downturn in the real estate sector and bank liquidity shortages also contributed to the slackening growth in mortgage credit as part of an overall slowdown in domestic loans.

Mortgage credit nearly doubled to Dh56.4 billion at the end of 2007 compared with a year earlier. It more than doubled through 2008 to end the year at Dh125.8 billion before growth started to slow down in the following years.

The report showed real estate lending grew by around 13 per cent to Dh141.7bn through 2009 and by nearly 15.6 per cent in 2010 to Dh163.1bn at the end of the year before it started to slacken sharply.

The figures showed lending to other sectors has also remained dormant, with total bank claims on the private sector sliding from around Dh730.8bn at the end of 2011 to Dh726.8bn at the end March.

In 2011, claims on the private sector shrank by around Dh5bn from Dh730bn at the end of 2010 and by nearly Dh3bn in 2010 after soaring by nearly 48 per cent in 2008 and 43 per cent in 2007.

According to a key Western financial institution, UIAE banks have emerged as more vulnerable to real estate downturns than those in other Gulf oil producers because of their massive lending for that sector.

The Washington-based Institute of International Finance (IIF) said overexposure to real estate and Saudi businesses has eroded the Gulf banks’ asset quality.

In the UAE, the banking system is significantly exposed to the construction sector and the highly speculative real estate sector. Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and government-related entities in Dubai.”

Quoting financial sources this week, the Sharjah-based Arabic language daily Alkhaleej said the Central Bank is preparing a draft mortgage law, adding that the UAE could become the second Gulf country after Saudi Arabia to have this law.

Analysts believe the approval of a mortgage law in the UAE would spur real estate lending and support growth in this sector, one of the key components of GDP along with oil and manufacturing.