UAE banks offer higher interest for short-term deposits

Move will cut loan to deposit ratios that jumped inline with loose lending policies. 
By Joanna Hartley
Sat 21 Feb 2009 01:44 PM

Higher interest rates for short-term deposits are being used by banks in the UAE to encourage deposits in a bid to boost deposit bases, it was reported on Saturday.

The move is aimed at improving loan to deposit ratios that jumped last year at many banks that resulted in the recent liquidity problems, which forced many banks to curb their lending policies.

Short-term fixed deposits are an expensive route for banks to take, but the move is in line with a Central Bank dictate to reduce loan to deposit ratios, said analysts.

HSBC is offering rates for fixed term deposits of one month, three months and six months of 5.05 percent, 5.75 percent and six percent, respectively, according to UAE daily The National.

Meanwhile, Standard Chartered has rates of 3.85 percent, 4.15 per cent and 3.9 percent for the same terms.

“The banks are now trying to attract deposits to adjust their risk; they need to beef up their depository system to be more immune and less risky. Reducing lending is not the only way to reduce risk,” said Yazan Abdeen, a fund manager at ING Investment Management.

The UAE’s Central Bank is expected to monitor loan to deposit ratios more closely from now on, as high ratios are an indicator of high risk in the banking sector, analysts added.

Emirates NBD saw its loan to deposit ration increase from 118 percent in 2007 to 128 percent last year, according to Wadah Al Taha, a market and banking analyst.

It is now offering 1.75 per cent, 2.25 per cent and three per cent on fixed deposits of one month, three months and six months, respectively.

“It was all right when the economy was growing fast and there was a hunger for loans. However, this ratio needs to come down under the changed economic scenario,” Al Taha said.

“I believe the central bank would be looking at this ratio more strictly now. It is a rebalancing act to shore up capital ratios, and a confidence-building measure at the same time that probably could lead to customers opting for longer-term fixed deposits,” added Deepak Tolani, a banking analyst at Al Mal Capital.

Earlier this week the Central Bank governor, Sultan Al Suwaidi, said the credit shortage had eased, with banks no longer requiring the AED50bn ($13.61bn) emergency fund.

“It has not been needed at this point in time because liquidity is better,” Al Suwaidi said.

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