Why new Eibor system is a win-win

The new Eibor system may result in a decline in interbank rates and lead to a rise in demand for mortgages, personal and auto loans.

The new Eibor system, which is expected to be introduced by the middle of next month by the UAE Central Bank, will be more efficient and transparent in line with international best practices, say analysts.

M.R. Raghu, managing director, Marmore Mena Intelligence, believes the new system wouldn't lead to an inherent rise or decline in Eibor rates. The new process is expected to make the system efficient and more accurately capture the risk factor. In the existing system, there is too much variation between banks' Eibor quotes on any given day due to the absence of a standard procedure across banks to decide the quotes.

Currently, the UAE Central Bank calculates the Emirates Interbank Offered Rates (Eibor) daily based on quotes received from a panel of 10 banks for maturities ranging from overnight to a 1-year period. The 2 highest and 2 lowest rates are discarded and the rest are averaged to arrive at Eibor.

"The new system is expected to fix a rate that will be more closely based on real market data," Raghu said.

Impact on rates
Some analysts are of the view that the new Eibor system will result in a decline in interbank rates, hence, making loans more attractive and leading to a rise in demand for mortgages, personal and auto loans. Under the new system, they expect that interest rates will not follow US Federal Reserve rates as aggressively in the future as in the past.

"We expect the Eibor to factor in the demand and supply scenario for credit given to individuals and corporates. Given the increase in deposits and a lower credit growth, Eibor rates are already facing downward pressure. Higher oil prices have been supporting the surge in deposits while low credit growth is being triggered by softer economic growth. Further, the UAE's fiscal regulators have incentives to keep their rates lower as higher rates would impact exports.

"Given these scenarios, we expect the Eibor to decline modestly going forward. This, in turn, will make loans more attractive, thus leading to a rise in demand for mortgages, personal and auto loans," says Devesh Mamtani, head of investments and advisory at Century Financial Brokerage.

"Moreover, a higher dollar would result in higher dirham valuation against other currencies, thus making tourist spending difficult. However, with the UAE dirham being pegged to the US dollar, the Eibor rates have always mirrored US interest rate routes. Despite the markets anticipating 3 to 4 rate hikes in this financial year in the US, given the probable change in the system defining the new key rate, Eibor rates may not be hiked as significantly as in the US," said Mamtani.

"Although Eibor is not expected to rise as aggressively as US interest rates, we do expect a slight increase from the current levels," he added.

Eibor on the rise
According to personal finance comparison website moneymall.ae, interest rates on personal loans range from 2.63 per cent up to 18.99 per cent for employees and self-employed. It includes new loans and transfer loans as well.

Interest/profit rate on auto loans start from 1.49 per cent and go up to 18 per cent, depending on the down payment made by the customer. Mortgage rates range from 2.99 per cent to 8 per cent, depending on the tenure.

Eibor has been on the rise since this month, with overnight rising from 1.25067 on March 1 to 1.26983 on Wednesday. The 3-month rate was pegged at 2.13067 on Wednesday, increasing from 2.01083 at the beginning of this month. One-year rate Eibor has risen from 2.66667 at the beginning of this month to 2.69350 on Wednesday.

Marmore's Raghu says floating rates such as housing loans are typically priced based on Eibor. Since the new system will be more efficient, be a fairer representation of market conditions and better comprehend risk, consumers are likely to benefit.

According to Raghu, the new system for calculation of Eibor is likely to introduce a standardised process to decide quotes across banks.

To avoid manipulative practices, appropriate internal controls and frequent audits should be in place to strengthen the benchmark setting process and enhance the credibility and reliability of the Eibor benchmark, he added.

Under the new system, Mamtani expects Eibor to factor in the demand and supply of existing loans to banks and large companies. A spike in loan demand would lead to a rise in interest rates and vice-versa.

The new system would focus on real time market data while determining the Eibor. One possible consideration would be the industry demand and supply where the interest rates would be determined by the economic growth/activity. He said another factor used to determine the Eibor could be inflation. The fiscal regulators have to make sure that inflation is kept under check in order to ensure that economic growth is not hampered.

Further interest rates will be monitored keeping in mind the trade balance as a huge chunk of economic growth depends on export-import businesses.

- waheedabbas@khaleejtimes.com