UAE Central Bank asks Banks to cut Rates

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UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi on Sunday urged banks to exert more effort towards reducing the cost of borrowing for current borrowers, particularly the category of businessmen. He said the current loan charges do not reflect the abundance of liquidity in the financial system.

Speaking at the second consultation meeting for this year in Abu Dhabi with the chief executives of banks operating in the UAE, Al Suwaidi said: “At this meeting, I would like to point out that borrowers and especially merchants/businessmen are complaining about high interest rate margins on their financial budgets.” The meeting was attended by 54 CEOs or their representatives from national, GCC (Gulf Cooperation Council), Arab and international banks, besides concerned executive directors and officials of the UAE Central Bank.

According to a report from the Abu Dhabi Chamber of Commerce and Industry earlier this month, some businesses are having to pay interest rates between 9 and 10 percent. In contrast, the three-month Emirates Interbank Offered Rate (EIBOR) has fallen from a peak of 4.8 percent in October 2008 to 1.79 percent yesterday as liquidity improves, according to Central Bank data.

The difference reflects a growing trend among banks over the past year to abandon EIBOR as a benchmark, claiming it does not fairly reflect the cost of securing funding. Instead, some lenders have started using their own internally-set base rate to determine the cost of loans.

Saif Bin Hadef Al Shamsi, senior executive director and head of treasury at the UAE Central Bank said the liquidity situation of the banks has improved substantially and that the EIBOR will go down further. He also said that UAE Banks’ surplus of liquidity is parked with the Central Bank, through Dh115 billion in certificates deposited with the Central Bank.

As per a banker who attended the meeting, lending rates cannot be linked to EIBOR unless deposit rates are lower than EIBOR. At present, there is difficulty in benchmarking lending rates with EIBOR as the deposit rates are well above that level. The six-month EIBOR, as of today, is 2.06 percent while the six-month deposit rates range between 3 and 3.5 percent, or even more. As per him the banks will be able to reduce the lending rates if the deposit rates come down.

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