Gulf oil producers need to introduce stricter rules on real estate loans and other consumer lending to avert a US-style mortgage crisis, a senior banker has said.

But the UAE and its partners in the six-nation Gulf Co-operation Council (GCC) should not go too far in such curbs as this could hit financial freedom and stifle the domestic economy, said Henry Azzam, Chief Executive Officer of Deutsche Bank in the Middle East and North Africa. In an article published in the London-based Al Hayat daily and other Arabic language newspapers, Azzam also urged banks to create risk-management units and expected the current global crisis to give rise to Islamic banking.

"Authorities should not allow personal or corporate debt to aggravate and should deal with any asset bubble in real estate and other sectors with pragmatism or it could explode and severely affect the local economy… there is a need now to introduce stricter and clearer rules on consumer lending," he said.

"As we know, the financial tremor that has hit key global markets will require a revision of many practices in the world of capitalism and liberalism… in this respect, supervisory authorities will have a bigger role to play in order to redress the deformities in the free economic system... but this crisis must not lead to suffocation of economic freedoms, without which it will be difficult to venture in creating new companies… any economy needs a creative financial and economic system that will make profits and provide the necessary funding at competitive prices… but this system must be coupled with an effective control and supervising mechanism which could prevent major crises." Besides controlling consumer lending, Azzam also urged GCC authorities to work for curbing speculation in the region's property sector to ensure that "the actual rather than the inflated demand is the real indicator for companies". Azzam did not elaborate on the proposed rules on consumer lending but some banks in the region have reported many cases involving circumventing the loan limit by some persons posing as businessmen. In the UAE, officials and experts believe personal lending has remained under control despite a sharp rise in such loans over the past year.

In an interview with the state-run Abu Dhabi television this week, UAE Central Bank governor Sultan bin Nasser Al Suwaidi said no lending problem is looming in the country but stressed all banks are under strict supervision. "We are monitoring and supervising all activities by the banks and I don't think there is a problem. But that does not mean we should intervene in their operations. We in the Central Bank supervise not manage banks," he said. In a recent study, the Abu Dhabi Chamber of Commerce and Industry warned the UAE's 24 national banks and 28 foreign units to be more careful to prevent a repetition of the damaging bad loan crisis that hit the UAE in early 1980s.

"UAE banks and other financing institutions are facing major challenges in their lending activities in the real estate sector," the Chamber said. "They include mainly an expected surge in funding, the absence of proper legislations to regulate the mortgage loans, a possible decline or stagnation in the real estate sector in the foreseeable future, and the absence of long-term studies on the property sector."

The study said mortgage loans remained relatively low compared to the banks' total credits and their available financial resources but added they could be affected in the long term given the expected surge in such credits.

"Real estate loans are usually long-term loans and they could negatively impact the banks' liquidity since their main financial sources are short-term deposits. What they need to do is to seek new long-term financial sources," it said.

"But risks remain ahead… some debtors might fail to pay back while the real estate market could go through a price correction period and this will certainly hit financing operations… a bigger risk is that a decline might take place in the property sector in the UAE and other Gulf states which are experiencing a construction boom." Central Bank figures showed real estate mortgage loans provided by the UAE banks rose to Dh64.9 billion at the end of March from Dh58.8bn at the end of 2007 and Dh31bn at the end of 2006. Personal consumer loans also swelled to Dh54bn at the end of June from Dh43bn at the end of 2007 and Dh31bn at the end of 2006.