By Stanley Carvalho & Martin Dokoupil
Cbank had urged commercial banks to lower rates but was knocked back.
UAE's central bank will keep looking at how to reduce the Gulf country's interbank offered rates and plans to meet with commercial banks on a regular basis, sources said on Wednesday.
The central bank said last month that EIBOR rates, based on quotes provided by a dozen banks, do not reflect true market lending rates, and that it wanted to consult the banks on how to bring them down.
Three banking sources told Reuters that the central bank urged commercial banks at a meeting on Wednesday to lower the rates but was knocked back.
A banker, who attended the meeting, said: "They just asked banks 'will you bring the rates down?' And we said no, it is the market that determines the rates."
Central bank officials were not immediately available to comment on the meeting.
Short term rates edged down from nearly five month highs after Dubai's government gave details of an offer for debt restructuring of its flagship company last week.
But bankers said the situation on the market was little changed as banks keep chasing deposits they need for longer term funding, with offshore credit hard to access.
Another banker, who spoke to Reuters on condition of anonymity, said: "Nothing new came out of the meeting, everyone's going round and round in circles and the same discussion."
He added: "The situation has not changed nor the central bank's position on EIBOR. Given the situation and with no change in banks' positions, rates are obviously going to edge up."
The central bank now plans to review the situation with banks on a regular basis in the coming months, but no specific schedule was given, another banker, based in Abu Dhabi, said.
The overnight rate was fixed at 0.60 percent on Wednesday, down from 0.63 a week ago. The benchmark UAE one month rate was little changed at 1.78 percent, while the Saudi benchmark was at 0.32 percent.
Treasurers at UAE based banks said there was still a reluctance to lend funds for periods of over one month.
Lenders do not want to have their funds locked up for longer because of concern about exposure to debt laden Dubai World.
The Abu Dhabi banker said: "Clearly there is a shortfall of liquidity. People are being very cautious as there is little detail about Dubai (restructuring offer)."
Dubai last week outlined a $9.5 billion rescue plan for indebted conglomerate Dubai World. The proposal, which offers lenders their money back in five to eight years and promises to repay two key bonds in full, was welcomed by markets.
UAE banks have booked provisions for their exposure to Dubai World and related entities and more provisions remain possible. Dubai's troubles are limiting access to funds from abroad.
Another factor keeping rates high is that UAE banks link pricing of loans to EIBOR; this gives them an incentive to push up rates to keep margins if they need to pay more for deposits.
In September, the UAE central bank rejigged the panel of providers for EIBOR and altered the formula used to calculate it, aiming to bring rates down and boost lending in the UAE.
Bankers said that injecting deposits to the banking system rather than an arbitrary change was a way to push EIBOR down.
The first banker, who also spoke to Reuters, said: "You can't bring rates down just like that, you have to give people the tools. The solution or issue is on deposits, on how much you can lend."
The UAE finance ministry said earlier this month there was no need for capital injection into banks but more funds could be provided if needed as the country still has $5.44 billion left from a $19 billion facility set up in 2008. (Reuters)