Lending costs may rise for businesses when banks drop the official benchmark rate as the base of their calculations in the coming months, analysts say.
Loans cost to rise as banks leave Eibor
Lending costs may rise for businesses when banks drop the official benchmark rate as the base of their calculations in the coming months, analysts say. Many lenders already peg consumer products such as mortgages and loans on their own internally set base rate, which they say better reflects the higher cost of attracting funding than the Emirates interbank offered rate (Eibor). Banks are increasingly expected to move away from Eibor to also determine the cost of loans extended to businesses.
"For banks, Eibor does not reflect the true cost of lending as they're paying higher on deposits and wholesale," said Janany Vamadeva, a banking analyst at Al-Futtaim HC Securities in Dubai. "As Eibor is too low and banks are focused on deposits rather than lending, they're pushing up lending rates." Emirates NBD will next month become the latest lender to abandon Eibor for its own internally set rate as the basis of interest charged on variable rate mortgages.
Mashreqbank, Standard Chartered and Union National Bank have already begun basing mortgage interest on internal rates. The move away from Eibor is despite the official benchmark rate rising by about 25 per cent since January. Three-month Eibor rose to 2.36 per cent yesterday, from 1.9 per cent at the start of the year. "Eibor is pretty much a technical rate," said John Tofarides, a banking analyst with Moody's. "Banks have more control about protecting their margins if they price loans at their own internal cost."
Although Eibor serves as a barometer for banks' funding costs in a healthy economy, the global financial crisis made banks more focused on building their balance sheets, which meant getting more of their funding from customer deposits than interbank loans. Credit growth remains sluggish. Loan growth expanded only 3.3 per cent last month compared with June last year. Deposit growth was even lower at 2.4 per cent last month from June last year.