UAE. UAE banks are likely to keep a tight lid on lending in coming years, even if the sector manages to avoid an immediate hit from the Dubai World debt restructuring, reported Reuters, citing market analysts.

The state-owned conglomerate, which is grappling with US$26 billion in debt, is in the final stages of preparing a debt restructuring plan to put to its 97 creditors.

Analysts have voiced concerns that domestic lending would dry up if banks are forced to take big losses on Dubai World-related debt.

The IMF estimated banks across the region would have to raise US$10 billion in funds if they were forced to absorb a 50% loss, or "haircut", on their Dubai World loans.

The UAE banking sector, already crippled by large-scale defaults in Saudi Arabia and the Dubai property bubble, is struggling to reach pre-financial crisis profit levels.

Dubai-based banks in 2009 posted a 31% overall decline in net income, a report from Global Investment House showed. Mashreq and Dubai Islamic Bank were worst hit, largely because of a spike in bad loans provisions.

"Banks will take a cautious approach in credit expansion until they see their non-performing loans peaking," HC Brokerage banking analyst Janany Vamadeva, told Reuters.

"Liquidity, too, would be a factor in play with stretched loan-to-deposit ratios and the current gridlock in the international debt markets post the DW announcement," he said. Banking stocks have recouped some losses in the past 10 days, as concerns eased on the potential outcome of the Dubai World restructuring. Recent reports have said that Dubai World will propose its creditors to repay the debt over seven years.

Credit conditions in the Gulf have already tightened since the onset of the financial crisis at the end of 2008, when a regional property boom ended and economic growth slowed.

A rise in corporate and personal defaults combined with expatriates leaving the country leaving debts unpaid have all contributed to a spike in provisions.

Banks in Dubai have strong government ties and hold up to US$15 billion in exposure to Dubai World.

"Either you take the impact straight away or you spread over the next seven to 10 years, but in the latter case there will be an impact on the level of profitability and the banks could become less competitive in terms of pricing," said a banking expert who requested not to be named. The long-term solution "still amounts to a fairly negative scenario because it is not clear how the banks will account for it," the person said.

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