The rate at which leading banks in the UAE borrow from each other has fallen by nearly 10 per cent since the start of this month.
It is the sharpest fall so far this year, reflecting more robust levels of liquidity in the financial system.
The dip in the Emirates interbank offered rate (Eibor) comes as controversy surrounds its equivalent rate in London, the Libor.
"There's more liquidity coming in [to the UAE financial system] from Europe and higher crude prices," said Sanyalaksna Manibhandu, a banking analyst at National Bank of Abu Dhabi.
"If people don't trust other benchmark rates they will look elsewhere and the Middle East and North Africa is looking fairly attractive." The three-month benchmark rate has fallen to 1.375 per cent from 1.526 at the start of the month. The rate hardly budged during the first six months of the year.
The measure is intended to be the basis for interest on business and consumer loans, including variable-rate mortgages.
But analysts are divided on how quickly the fall will lead to a cheaper cost of borrowing or a rise in lending activity. Lending has stalled at 0.3 per cent in the UAE during the first five months of the year.
"If the cost of lending between banks comes down, there is evidence it will help corporates and businesses," said Chiradeep Ghosh, senior analyst at Securities and Investment Company in Bahrain.
But Mr Manibhandu added upcoming rules were likely to dissuade banks from enticing borrowers in the meantime. From September 30, financial institutions will be restricted in their lending to the Government and firms with government links. Other rules that take effect from January 1 require lenders to hold high-quality liquid assets equal to 10 per cent of their liabilities.
Eibor shares similarities to Libor in the way it is composed. It is set by a panel of 12 local and international banks that quote indicative interbank lending rates in UAE dirhams for tenors from one week to one year. To calculate Eibor in each tenor, the two highest and two lowest quotes are discarded before an average is taken.
The Central Bank is searching for a replacement bank to sit on the panel after Barclays asked to leave. The British bank has agreed with US and British regulators to pay US$453 million (Dh1.7 billion) in fines for attempting to manipulate Libor through its submissions to the Libor panel.
