The Central Bank plans to create an official interbank lending rate that could encourage banks to provide cheaper loans.
Central bank wants official interbank lending rate
The Central Bank plans to create an official interbank lending rate that could encourage banks to provide cheaper loans and help stimulate the economy. The regulator wants to create an official Emirates interbank offered rate (Eibor) that is more in line with other regional economies such as Saudi Arabia's, analysts said. As a first step, officials met local and international lenders on Monday, said a statement from the regulator released yesterday.
"There is certainly potential for lowering the rates and it will be very favourable for the economy under the current circumstances," said Nasser Saidi, the chief economist at the Dubai International Financial Centre. Existing Eibor remains higher than many other local and international benchmarks, such as the London interbank offered rate (Libor) and the Saudi Arabia interbank offered rate (Saibor).
Three-month Eibor stood at 2.21 per cent yesterday but analysts said the Central Bank would like it to be more in line with Saibor at 0.64 per cent, or Libor at 0.47 per cent. "The current interbank rate does not reflect the actual situation," said Delphine Arrighi, the senior rating strategist at Standard Chartered in Dubai. "Liquidity has improved since last year and Eibor has declined, but not to the extent of Saudi Arabia."
Ms Arrighi said banks in the UAE were still struggling to keep their loan ratios down against the deposits they have, and are finding it difficult to lower the interbank lending rates. "The objective behind this initiative of the Central Bank is twofold: primarily to set up an official benchmark for the dirham offered rate; and secondly, to facilitate a process whereby the rates fixed are a fair representation of the prevailing market conditions," the Central Bank said yesterday.
"The rates should also reflect the strength of the domestic banking system." Official data show UAE bank deposits fell 1.1 per cent in June as lenders remained under pressure to make enough provisions for bad loans. "Banks are still constrained by their loan-to-deposit ratios and are still in the quest for getting more deposits," said Ms Arrighi. But more action may be required by the Central Bank to reduce the cost of lending as banks remain under pressure to meet loan-to-deposit rules.
"Interbank is a market rate; it has to be determined by the market and the only way for the Central Bank to have a say in the rates is that it has to give them (banks) some means to decrease the rates," Ms Arrighi said. The creation of an official Eibor benchmark could also help in the development of the UAE's capital markets, Mr Saidi said. "Eibor is an important benchmark and indicator that could help us in developing a commercial paper market which is missing in the UAE," he said.
"The Central Bank is not trying to take control of the rates. I view this as necessary in terms of the soundness of the money market and giving the regulator the ability to intervene, if required, to preserve orderly market conditions." The Central Bank said it would continue discussions over new system of calculating Eibor, when participating banks and the regulator had finalised a formula. Eibor is calculated using an average of rates from 10 foreign and domestic commercial banks, excluding the highest and lowest rates to strip out anomalies.
The participating banks are Abu Dhabi Bank Commercial Bank, ABN AMRO, Citibank, Commercial Bank of Dubai, Emirates Bank, HSBC Bank, Lloyds TSB Bank, National Bank of Abu Dhabi, National Bank of Dubai and Standard Chartered. The Government last October promised to guarantee deposits and savings in local and foreign banks amid rising concerns over the country's economy and pledged to pump a total of Dh120 billion (US$32.67bn) into the financial system, of which Dh50bn was available as a cash facility.
"Eibor is another step in the direction of stabilising the market," Mr Saidi said. * with agencies email@example.com