x Abu Dhabi, UAESaturday 20 January 2018

Easing of bank lending rate may offer little consumer relief

Consumers may be in for a long wait before they enjoy the benefits of measures taken by the Central Bank to lower interbank lending rates.

Consumers may be in for a long wait before they enjoy the benefits of measures taken by the Central Bank to lower interbank lending rates. Eibor, or the Emirates interbank offered rate, is the interest rate that banks charge when they lend to one another, and its lowering should lead to cheaper costs on borrowed money. The Central Bank says it will introduce mechanisms to lower the rate. In theory, this should make the cost of loans to consumers cheapers, but analysts say consumers may not see the benefit.

"The banks will respond positively to Eibor but the key question is whether they will pass on the benefit to customers," said Robert McKinnon, the managing director of equity research at Al Mal Capital. "Initial indications are that a decline in Eibor has not led to a resulting decline in borrowing costs." Lending in the UAE has slowed in the wake of the global financial crisis and banks remain reluctant to extend finance while their deposits still lag government capital adequacy rules.

Banks' liquidity constraints have helped keep Eibor rates comparatively high. In response, the Central Bank is aiming to grease the wheels of the money markets by introducing a new mechanism to determine the interbank offered rate with the hope that it will lower rates to a level more reflective of the market and at the same time help to boost lending. The regulator said last month it intended to revamp the panel of banks that submit their rates to determine Eibor.

However, analysts are sceptical about how much difference the new Eibor regime will make for consumers seeking loans to buy cars and other goods. "If Eibor comes down, money market rates will not come down to the same extent, so banks' margins will widen," said Mr McKinnon. As consumer loans and corporate bilateral loans offered by banks are determined on a cost plus rate basis, changes to Eibor would not be reflected in these products, said John Tofarides, a Moody's analyst.

But corporate syndicated loans are more closely linked to Eibor, meaning businesses applying for these loans could see a lowering of rates, he added. "The products where the pricing is linked to Eibor will see that impact, and that would be predominantly wholesale bank lending, which is linked to Eibor," said Sanjay Uppal, the chief financial officer of Emirates NBD, the UAE's biggest lender by assets.

Wholesale banking refers to lending to corporations as opposed to retail banking, or lending to individuals. "You will see that translate to a reduced price burden for corporates." That could represent a further boost for businesses in the UAE , following recent steps by the government to waive registration fees for corporates while making the development of SMEs a key economic policy priority. The Central Bank has also extended the period of its own overnight repo rate to one month from one week. The repo facility allows banks to deposit certain types of collateral with the Central Bank while they can take out fresh funds that they can then use at their discretion.

"By opening up the repo facility, the Central Bank addressed banks' near-term funding needs," said Mr Uppal. The new panel of providers for the interbank offered rate has been raised from ten to 11 banks, including four new local banks: First Gulf Bank, Union National Bank, Mashreqbank and RAKBank. Currently the 10 local and foreign banks on the panel submit their rates and the average of eight is calculated, excluding the highest and lowest figures.

* additional reporting by Uta Harnischfeger @Email:tarnold@thenational.ae