x Abu Dhabi, UAEFriday 28 July 2017

Lending slows as banks close for Eid

Rates rise and Central Bank's measures seem to have little effect.

The Central Bank's emergency measures to ease a credit crunch in the UAE appear to be having a limited effect - at least if the interbank lending rate is any guide. Rather than declining after the Central Bank's intervention, as had been hoped, interbank lending rates rose. Most observers think that few, if any, banks have taken advantage of the emergency lending facility. "The package was not as generous as people had thought when the original announcement was made," said Mushtaq Khan, an economist at Citigroup.

As long as banks worry that their peers may suffer from serious problems, they will probably continue to withhold funds from each other. "It's not yet clear whether the problem is... something the Central Bank can solve by simply adding liquidity, or whether there is a deeper malaise afflicting the market," said Ala'a al Yousuf, the chief economist at Gulf Finance House. "These things can cause a domino effect. If there is stress in the credit market, then the weakest link will give first, and then the next weakest link and so on. We don't know where the weakest link is until the system is stressed out. Then we'll find out," he said.

Bank lending rates throughout the Gulf shot up today, with the Emirates interbank offer rate (Eibor) breaking four per cent for the first time since January, hitting 4.19 per cent, compared with 3.96 per cent on Sunday. In Saudi Arabia, rates hit 4.06, another high since January. Last week, the Federal Government took special measures to ease a liquidity squeeze by injecting Dh50 billion (US$13.6bn) into the local money market. On Sunday and yesterday, the central bank of Kuwait followed suit, extending loans to local banks on a case-by-case basis and tailoring them to the banks' needs, according to an official at a large Kuwaiti bank.

The Kuwait central bank is understood to be asking for no collateral to back up the loans, which range in length from overnight to one month. The size and the interest rate has been at the discretion of the central bank, which in some cases has charged a rate of two per cent interest for overnight loans, and four per cent for one-month loans. The central bank of Kuwait could not be reached for comment.

Late last Thursday, the UAE Central Bank offered to lend local banks an amount equivalent to their reserve requirement, while charging them three per cent interest above the current Central Bank repo rate, which stands at two per cent today. The repo rate is the discount rate at which a central bank repurchases government securities from the commercial banks. The Central Bank declined to say how many banks had taken advantage of the offer.

"I was a bit surprised by Kuwait," said Mr Khan. "Not too long ago, they seemed determined to make a concerted effort to keep things tighter. Now, suddenly it seems they're injecting money into the market." Regarding the UAE, Mr Khan said: "I get the sense that banks have not availed themselves of the offer from the Central Bank last week." Banks and financial markets in the Gulf are likely to close for three days today to celebrate the Eid al Fitr holiday. Analysts are calling the timing of the holiday fortuitous, while wondering what effect this apparent lack of lending will have on the economy.

"It will give market participants some time to understand the complexities of the bailout transaction and the implications, if any, that the entire crisis may have for the region," said Imran Ahmed, the managing director of asset management at Mashreqbank in Dubai. "It's sort of like when you receive an e-mail: it's often better to sleep on it and send something out the next day, rather than writing something in the heat of the moment that you'll later regret," he said.

@Email:tpantin@thenational.ae