Banks need to lower the cost of borrowing to help businesses struggling with high interest rates, says the Central Bank governor.
Current loan charges do not reflect the abundance of liquidity in the financial system, said Sultan al Suwaidi.
"Borrowers and especially merchants [and] businessmen are complaining about high interest rate margins on their financial budgets. Borrowers are the basis for the growth and prosperity of the banking business, therefore I would urge you to reduce interest margins on loans as much as realistically possible," he told a meeting of chief executives and other representatives of the country's banks at the Central Bank yesterday.
Lowering borrowing costs for businesses is being highlighted by the regulator as a way of stimulating the private sector's recovery from the global financial crisis.
Many corporate borrowers are facing interest rates well above official benchmark rates as banks push up charges, say analysts.
Some companies are struggling to secure any funding as risk-averse banks remain selective about who they lend to.
Mr al Suwaidi urged lenders to better support the business community.
"Taking into consideration reduced rental incomes and reduced profits of business, their situation will reflect on you so you have an interest to help them," he said. "I would like to point out that liquidity in the financial system is excellent. Liquidity is at a comfortable level so there's no reason to put pressure on borrowers."
He made his comments at the second consultative meeting of banking representatives this year.
Some businesses are having to pay interest rates of between 9 and 10 per cent, according to a report from the Abu Dhabi Chamber of Commerce and Industry earlier this month. In contrast, the three-month Emirates interbank offered rate (Eibor) has fallen from a peak of 4.8 per cent in October 2008 to 1.79 per cent yesterday as liquidity improves, according to Central Bank data.
The difference reflects a growing trend among banks over the past year to abandon Eibor as a benchmark, claiming it does not fairly reflect the cost of securing funding. Instead, some lenders have started using their own internally-set base rate to determine the cost of loans.
"Some banks with lower margins will begin to lower charges but not as fast the governor would probably like to see," said John Tofarides, a banking analyst at Moody's Middle East.
The health of the financial system has gradually improved as banks cleanse their balance sheets after a build up of bad loans linked to the financial crisis. Loan-to-deposit ratios have fallen below 100 per cent.
But provisions to cover non-performing loans crept up for a seventh month in a row in March to Dh46.6 billion (US$12.68bn), according to Central Bank data.
As a result credit growth is forecast to remain between 4 and 7 per cent this year, said Mr Tofarides.
"Some Dubai banks are still downsizing their portfolio so loan growth will be modest in Dubai and slightly higher in Abu Dhabi," he said.
Mr al Suwaidi also said some banks were changing lending terms for customers.
Some firms have complained about banks changing loan agreement regulations and interest rates on loans without customers' consent, according to the recent report from the chamber. Representatives from the chamber relayed the concerns of the private sector to Mr al Suwaidi during a meeting with the Central Bank this month.
"We asked the Central Bank what was a fair cost of borrowing for the private sector," said Khalfan al Kaabi, the first vice-chairman of the chamber.