Credit is the vital lubricant of every economy. Like a motor without oil, once credit dries up, even the most efficient economy grinds to a halt, damaging its parts.
As we report today, interest rates and lending costs are steadily decreasing, two years after lending drained to a trickle following the financial crisis. A drop in rates "should translate into improved lending appetite and that will be manifested in lower costs or a relaxation in risk parameters", said Rahul Shah, a banking analyst at Deutsche Bank in Dubai. In other words, the engine is running smoothly again.
Even in a resource rich, cash flush market like our own, nearly every facet of the economy depends on credit. If individuals can't get loans from banks, they cannot finance their purchases of flats and homes that have become such a vital part of our nation's economy. If banks in the UAE cannot borrow from one another, they cannot in turn, provide loans to corporations who depend on this financing to build projects that employ so many of our region's workers. Small businesses and entrepreneurs, in particular, require financing from banks to get their ideas off the ground and create new jobs.
The three-month Emirates Interbank Offered Rate (Eibor) has dropped 2.6 per cent so far this month to 2.075 per cent, its lowest level this year, Central Bank data show. The sharp dip follows little movement in the following three months of the year. Eibor has slowly declined from a peak of 4.8 per cent in October 2008.
The word credit originates from the Latin for "to be believed". As complicated as it may seem, credit is about belief. But this belief must not be blind. Only through more rigorous and universal lending standards can confidence be restored to local markets over the long term.
The economic downturn began because credit had become too easy. It endured because credit became too scarce. The availability of credit appears finally to be approaching a happy medium that will help the local economy grow steadily. A sound regulatory infrastructure that ensures that credit remains neither too easy nor too scarce will be vital for our market's long-term growth.