The UAE central bank, keen to lower interbank rates and spur lending, said its new offered rate mechanism would begin next month, and made its own borrowing facility more attractive. “To finalize the project, it will probably take until the first half of September,” Mohamed Al-Tamimi, assistant executive director of the central bank's treasury department told Reuters. The central bank expressed dismay this month at persistently higher interbank rates, saying they did not reflect the market. It said it would coordinate with commercial banks to create a benchmark, although it was unclear how that would lower rates. Under the proposed new system, the central bank could change the number and composition of the current panel which sets the Eibor interbank offered rate. Currently, 10 local and foreign banks submit their rates and the average of eight is calculated - excluding the highest and lowest figures. The 10 banks are: Abu Dhabi Bank Commercial Bank, ABN Amro, Citibank, Commercial Bank of Dubai, Emirates Bank, National Bank of Dubai, HSBC Bank, Lloyds TSB Bank, National Bank of Abu Dhabi and Standard Chartered Bank. The central bank also extended the period of its own overnight repo rate to one month from one week, effective Wednesday, to encourage more banks to use the facility. “This is mainly to give more flexibility to the banks,” Tamimi said. ‘It is for the sake of reducing the cost and to make it easier for banks to utilise the repo facility. “Hopefully it will help the Eibor rate to reflect the dirham money market rate.” The UAE's one-month interbank offered rate stood at 1.83 percent Wednesday while the official repo rate stood at 1 percent. “It remains to be seen if more banks will use it, but if they do this will have a positive impact on the interbank market liquidity, and we should see Eibor coming down further as a result,” said Delphine Arrighi, fixed income and rates strategist at Standard Chartered. A Dubai-based banker said smaller lenders unable to borrow at current rates would benefit from the central bank's move. “It gives you further space to get your liabilities in order,” he said. Interbank lending rates dropped at their fastest pace since May in the wake of the central bank's announcement o on Aug. 4, but still remain high. The three-month rate was at 2.2 percent Wednesday - down from 2.45 percent on the day of the announcement on Aug. 4 - while the comparable Saudi rate was at 0.64 percent. The UAE's high interbank rates are a result of liquidity constraints banks are experiencing, Arrighi said. “Even though liquidity has improved, these banks are constrained on their balance sheets because of their loans-to-deposit ratio exceeding the limit set by the central bank,” she said. “The only way to improve their ratios is to try to get more deposits which tends to push up the interbank lending rate.” The central bank, which cut rates last year as the credit crisis hit the Gulf, has said no additional measures were needed to bridge the gap between loans and deposits at UAE banks. That has left banks short of liquidity to extend new loans.
