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Central Bank to Make Interbank Rates Public

DUBAI — In a move that could provide reliable and transparent data on the health of the banking sector and liquidity within it, the UAE Central Bank said on Tuesday that it is in discussions with banks to establish an official interest rate for local-currency loans between banks.

The regulator said that the move is aims to set up a reference point for the short-term interest rates at which banks lend to each other and to improve market information.

The Central Bank said in a statement that its goal is, “primarily to set up an official benchmark for dirham offered rate and, secondly, to facilitate a process whereby the rates fixed are a fair representation of the prevailing market conditions.”

The step comes as the interbank rates — also known as Emirates Interbank Offered Rate, or Eibor — has been stubbornly high compared to the Central Bank’s key policy rate.

The domestic interbank offered rate is a widely followed benchmark. Borrowing costs for corporate customers and home-owners vary depending on the prevailing rates.

The Dubai Electricity and Water Authority has an outstanding sukuk whose profit rates are linked to the Eibor. In July last year, HSBC launched home mortgage plan which was linked to the three-month Eibor plus a fixed 4 per cent. The bank reviews the mortgage rate every quarter and readjusts the interest rates based on the prevailing Eibor.

Interbank rates are currently calculated on the basis of inputs from 10 banks, both national and foreign. The highest rate and the lowest rates are removed to calculate the average lending rates. Banks largely rely on interbank lending to manage their short-term liquidity. Banks with surplus funds offer funds to the market at a particular interest rate for a fixed term.

On Tuesday, the three-month interbank offered rate stood at 2.45 per cent compared with the Central Bank’s repo rate of 1 per cent. Repo, or repurchase, rate is the rate at which banks can borrow from the Central Bank.

Historically, the interbank rates had closely followed the Central Bank’s repo rate. In the previous two years, interbank rates were below the Central Bank’s repo rate, indicating that excess liquidity was available in the banking system.

However, the relationship has reversed since the middle of July 2008. While the Central Bank successively cut its policy rate to match the easing by the US Federal Reserve, the interbank rates kept soaring because banks hoarded cash to survive the global financial crisis. The three-month interbank rates hit a record high of 4.425 per cent in November last year when the repo rate stood at 1.5 per cent.

The Dh120 billion funding by the Central Bank and the federal finance ministry has significantly eased the tight liquidity conditions, but interbank rates have remained markedly higher than prevailing rates in other GCC countries, which, like the UAE, peg their currencies to the US dollar.

· aruna@khaleejtimes.com