UAE banks are in serious trouble due to a Dh500 billion ($136 billion) funding shortage, according to senior bankers quoted in a report.

By 2007-end, total bank assets topped Dh1 trillion, and they hit Dh1.4 trillion by June-end this year, according to the Central Bank, which is likely to drop by Dh500 billion due to the  withdrawal of foreign funds, according to the Gulf News report.

'Banks need the necessary capital to provide financing, and with funds flowing out of the country, the only option for the government is to step in,' he added. Most of the banks claim that no liquidity crisis exists whatsoever, so there is a lack of transparency.

'Transparency in such circumstances is crucial towards the government and the Central Bank,' the official said.

As foreigners comprise nearly 40 per cent of UAE bank deposits and the widening gap of over Dh56 billion at the end of June, between total loans and advances and total deposits of banks, only strong government action can save the system.

'Foreign deposits that are being withdrawn from the system in addition to the increasing liabilities compared to assets are forcing the UAE banks into a corner,' a top official at a leading bank was quoted as saying in the report.

'The Central Bank did not actually pump Dh50 billion into the system, as these facilities are for banks to borrow. Instead, what is needed is strong government intervention by placing deposits with the bank to compensate for the outflow of foreign funds,' he said.

Bankers at the same time, agree that only a nominal amount of the Dh50 billion of facilities offered by the Central Bank has been utilised.

'These foreign funds were actually hot money that flooded into the country during the increasing speculation about the de-pegging of the UAE dirham from the US dollar, especially after Kuwait departed from the peg,' a senior executive at the National Bank of Abu Dhabi said.

'Now the trend has reversed, and accordingly we find more than Dh200 billion is being withdrawn from the system,' he added.