The bank asset quality in the UAE has deteriorated in the short term due to oversupply as number of completed projects entered the market and the Gulf oil producer faces several challenges to reduce the risk, Sultan Nasser Al-Suweidi said. 
"The UAE has several challenges. Among them is the need for banks and other financial institutions to establish policies regarding real estate financing risk and oversight," Al-Suweidi told a conference on developing housing finance in the region. 
"The next one is developing legislative system to allow lenders to have effective control over mortgages and speeding up the process of possessing the mortgage property as a guarantee in the event of defaulting on the payment," he said. 
The OPEC member has yet to recover from a property market collapse that followed the global financial crisis in 2008 and led to a $25 billion debt restructuring in Dubai's flagship developer, stifling bank lending and pushing provisions against bad loans to record levels. 
The four-year decline in house prices is not expected to end this year as oversupply weighs on the market. House prices in the emirates of Dubai and Abu Dhabi are expected to drop another 5 percent and 11 percent this year, a Reuters poll showed. 
"There is an immense need to have an active legislative framework, including the real estate registrar and also dispute settlement bodies and this would encourage banks to accept houses as collaterals for financing," Al-Suweidi said.  
Property firms in the second largest Arab economy and one of the world's top five oil exporters have been forced to cancel projects and restructure their huge pile of debt with the government help.
Last month, the federal government said it cut struggling Islamic lender Amlak's debt burden by $1.1 billion in an effort to revive the Dubai mortgage provider whose stock trading has been halted since 2008.
Despite some recovery, bank lending remains in low single digits in the UAE, while provisions against bad loans rose to a record 55.3 billion dirhams ($15.1 billion) in December, up 25 percent from a year ago, central bank data show.      
Most UAE banks have large capital cushions by international standards and the central bank has said their exposure to debt crisis-hit Europe is only minor.