x Abu Dhabi, UAEThursday 18 January 2018

Debt worry drives up cost of bank borrowing

Consumers may feel pinch with rates set to rise further as finance becomes more scarce.

Bank borrowing costs have risen by more than a quarter this year as lenders remain weighed down with concerns about exposure to big corporate debts at home and across the region. With the official cost of borrowing expected to rise further in coming months, consumers could feel the pinch through increased prices of products such as home loans and credit cards.

Banks are reluctant to lend at cheaper rates as liquidity remains tight and uncertainty persists about provisions to protect lenders against losses related to Dubai World, other Dubai entities and the Saudi Arabian conglomerates Saad Group and Ahmad Hamad Al Gosaibi and Brothers. "Uncertainty tends to push up lending rates," said Khatija Haque, an economist at the investment bank Shuaa Capital. "If banks are worried about potential disclosures or losses of debt restructuring, there's an effect associated with that."

The price of borrowing crept up during the global financial crisis as banks found it difficult to attract deposits, an important funding source for lending. Increased borrowing costs for banks could affect customers through higher lending rates for banking products or difficulty accessing credit altogether. The benchmark interest rate used by banks for lending to each other, the three-month Emirates interbank offered rate (Eibor) rose to 2.34 per cent yesterday, its highest this year, from 1.9 per cent at the beginning of the year.

Eibor's advancement over recent months is a worry for the Central Bank, which is concerned high borrowing costs may be preventing companies from taking out loans to make investments and generate jobs. Credit growth remains sluggish, with a 0.1 per cent contraction in loans last month to Dh1.02 trillion (US$277.71 billion) compared with April, providing more evidence of the bleak lending environment.

Customer deposits also declined, down 0.2 per cent to Dh970.8bn last month from April, Central Bank data show. With loan-to-deposit ratios stubbornly high in the banking system, lenders are less encouraged to extend new finance. Central Bank officials had hoped a resolution to Dubai World's debt restructuring would help bring down Eibor and spur loan growth by improving banking confidence. Concerns about exposure to the Dubai Government-controlled conglomerate's debt have been blamed by analysts for a reluctance among banks to lend funds for longer than one month.

Yet Dubai World's announcement last month of an agreement with creditors on restructuring $23.5bn of debt has so far failed to lead to a drop in Eibor. "If you agree that a major explanation for Eibor going up is Dubai World, perhaps this means there are other Dubai uncertainties behind it going up," said a Central Bank official, who spoke on condition of anonymity. Analysts say a drop in Eibor and a resultant increase in lending is unlikely to happen until banks had booked their provisions for Dubai World and had a clearer outlook about possible losses through their exposure to other potential corporate restructuring involving Dubai companies.

Creditors are also still awaiting a final resolution to the financial troubles engulfing the al Gosaibi family, whose businesses owe $9bn to local and international banks. "Banks are facing a pipeline of provisions and they don't know how much of a hit they will have to take," said Deepak Tolani, an analyst at Al Mal Capital in Dubai. Eibor's level is higher than the London interbank offered rate (Libor), which stands at 0.54 per cent. In an ideal economic environment, the UAE's benchmark interest rates should closely track Libor due to the dirham's peg to the US dollar.

Financial regulators in other countries have responded to rising interest rates by offering banks short-term funding at cheap rates to help encourage lending. "If you look at the Bank of England when Libor shot up, the bank came out with an emergency liquidity facility where banks could borrow at a lower rate," said an economist at a UAE bank. "I'm not certain if the UAE Central Bank has tools at its disposal to offer a similar facility."