The banking sector in the world's third-largest oil exporter is heavily exposed to the debt problems of state-owned conglomerate Dubai World, which are expected to hamper recovery in the second largest Arab economy this year.
"The Dubai World offer is better than what we expected," Younis Al-Khouri, director general at the UAE Finance Ministry told reporters. "It will have a positive impact on banks."
Dubai said on Thursday it would spend $9.5 billion to restructure its debt-laden flagship firm in a plan that offered to repay two key bonds and give lenders their money back in up to eight years.
Dubai stocks rose to an 11-week high on the proposal.
The cost of insuring Dubai debt fell sharply on the day of the proposal, though they began to rise again the following day on doubts about how the Gulf Arab emirate would fund its share of the plan, which still needs to be cleared by creditors.
Emirates NBD and Abu Dhabi Commercial Bank are part of a seven-member committee believed to have most exposure to the debt-laden conglomerate.
AL-Khouri said earlier this month the UAE banks were strong enough to absorb any shock, even from Dubai World's restructuring, and no capital injection was needed for now.
Estimates of potential exposure of banks to Dubai World has ranged up to $15 billion.
The UAE government has, since the onset of the global financial crisis, introduced several measures to shore up local banks' balance sheets.
The UAE still has 20 billion dirhams ($5.45 billion) left from a 70 billion dirham facility set up in 2008 to inject liquidity into the banking system, the ministry has said.
Meanwhile, debt-saddled Middle East jewelry retailer Damas International said Sunday it had reached a "standstill" agreement with most of its creditors and was moving ahead with a restructuring plan.
The Dubai-based company did not specify the amount of debt it wanted to delay payments on, but local daily, The National, last week put the figure at about $872 million.
"This is a significant, positive announcement, demonstrating the confidence of our bank lenders in the strength of the underlying business model of Damas, the leading retail jewelry company in the Middle East," the company said in an e-mailed statement.
"A restructuring plan is currently being developed by the company, which will be implemented at the end of the standstill period," the company said without providing other details about the agreement or giving an indication about the duration of the standstill.
The move offers a glimmer of good news for the family-run business which last week was fined by a Dubai watchdog for improper financial deals and lax corporate oversight.
The penalties levied against the company were the most severe to date and came amid Dubai's efforts to shore up its business and investor-friendly image in the region after the global meltdown dried up credit markets and left a number of companies in the Gulf struggling to repay their debts.
The sanctions included fines of $3.7 million, the resignation of the entire board of directors, voluntary bans on the three brothers who oversaw the business and requires them to make good on an earlier promise to repay nearly $100 million in cash and 4,277 pounds (1,940 kilograms) of gold improperly taken from the firm.
Damas has estimated the total amount wrongly taken from the company at about $165 million, with the funds used to pay for real estate and other investments.
