x Abu Dhabi, UAETuesday 25 July 2017

On the Money: Cash under the mattress could wake up banks

If we knew the truth about the interest rate game, we’d be stashing our money under our mattresses without a care in the world that there’s no interest to be gained by parking it there.

Gary Clement for The National
Gary Clement for The National

How happy are you with your bank and the interest rates it pays on your all-important, hard-earned savings and deposits? Come on, don't be shy; it's OK if you are dissatisfied - angry even. After all, you are not alone. There are millions of other banking customers around the world who feel the same way as you. And me.

These days, banks are paying minuscule interest rates (if any) on our deposits and savings accounts, all the while slugging us higher and higher interest charges on credit, such as car loans, personal finance and credit cards.

The interest-rate game played by the banks is a complicated cat-and-mouse affair.

And - here's the cynic in me coming out - it was probably designed that way to keep the average banking customer in the dark. If we knew the truth, we'd be stashing our money under our mattresses without a care in the world that there's no interest to be gained by parking it there.

Then again, if many banks in the UAE are only offering 0.10 per cent to 0.63 per cent interest on a savings account, does it really matter if it's under the mattress? At least there'd be a certain amount of satisfaction by doing that: the bank wouldn't be making a profit on our money either.

Here's where it starts getting complicated. Some of you may have heard of Eibor, or Emirates interbank offered rate.

Eibor is the interest rate at which banks lend to each other. They lend money to each other for a variety of reasons, but the most common reason is because they may find themselves short of cash - or liquidity - at the end of a busy day of banking.

Like every central bank around the world, UAE Central Bank regulations require banks to keep a certain amount of cash in reserve, so if they come up short, they have to borrow money (usually short term, but sometimes even overnight) to top up its reserves from another bank at the Eibor rate.

On March 19, the three-month Eibor rate stood at 1.53625 per cent. This is based on the rates submitted by 12 UAE banks to the Central Bank, which then excludes the two highest and two lowest rates and averages the rest out.

That's the boring bit out of the way. But here's where it gets interesting. Banks need our deposits: our savings, our salary transfers, even our credit applications. Without our money, they wouldn't exist.

In return for our money, the bank pays us interest. At the height of the credit crisis, banks were desperate for our cash - and rewarded us pretty well for it.

In 2008, my bank, HSBC, offered me a respectable 6 per cent for a fixed-term deposit of six months (or possibly 12; I can't remember which now). By June 2010, those rates had slipped to 2.9 per cent for six months and 2.88 per cent for 12 months.

Today, HSBC is offering 0.8652 per cent for that six-month term deposit and 0.9748 per cent for 12 months, a far cry from the heady days when it was short of liquidity, but long on desperation when it came to filling its coffers by offering attractive rates.

In June 2010, HSBC offered 3 per cent interest on its savings account. Today, that rate has plummeted to 0.10 per cent. Interestingly, it offers 1.5 per cent interest on its eSaver account - definitely a better option than locking your money away in a fixed-term deposit for an insultingly tiny rate. But it's not just HSBC.

Let's head back to June 2010 again. At that time, Mashreq Bank was offering 3.5 per cent on its savings account. Today, that same account attracts just 0.25 per cent interest on your savings. RAKBank was paying 3 per cent, but is now paying 0.50 per cent.

So the banks take our money and offer us little, if any, interest on it. But they use our cash deposits to lend it en masse to other banks at the, for instance, three-month Eibor rate of 1.53625 per cent. That's a tidy little profit they've made on our money, don't you think?

Of course, not all of a bank's profit is derived from making money from our money through interbank lending or playing the money market with it. There's a whole host of other elements that play a part in that. But hey, every little bit counts.

Some would blame the low interest rates paid to savers on regulations the Central Bank introduced last year to curb irresponsible lending practices and to prevent consumers from overleveraging.

That move, no doubt, prompted the banks' backroom boys to come up with some "creative" number crunching to keep the profits rolling in, hence those unprecedented low interest rates being offered to banking customers.

According to the Central Bank, total bank deposits in the UAE hit Dh1.06 trillion in December 2011, up 1.9 per cent for the year. So it appears the banks have achieved their aim of increasing liquidity.

We don't have a great deal of choice - and switching banks in search of better interest rates is not the easiest thing to do, especially here. Which brings me back to that mattress idea as a short-term vehicle to park our money.

If we all did it, perhaps we'd see a return to those heady days of attractive rates and an appreciation - on the part of the banks - that they need us just as much as we need them. And one day, we may even learn to trust them again.