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Tue 16 Feb 2010 12:41 AM

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UAE cbank to look at steps to lower interbank rates

EIBOR rates have risen in recent weeks, as banks chase deposits for long term funding.

UAE cbank to look at steps to lower interbank rates
MARKET RATES: The UAEs central bank will consult with commercial banks on how to reduce interbank offered rates, as they do not reflect true market lending rates. (Getty Images)

UAE's interbank offered rates do not reflect true market lending rates and the central bank will consult with commercial banks on how to reduce them, a central bank official said on Monday.

However, commercial bankers said traded rates were only likely to drop if deposits increased.

EIBOR rates, based on quotes provided by a dozen banks, have been edging up in recent weeks, touching six month highs, as banks chase deposits they need for longer-term funding and as offshore credit has dried up because of uncertainties over Dubai's debt restructuring.

Speaking to Reuters, Saif Hadef al Shamsi, senior executive director at the central bank's treasury department, said: "It does not reflect true market rates, so this is going to be discussed thoroughly at our next meeting with commercial banks."

He added: "There are some demands from banks and the central bank will come up with some proposals at the next meeting on how to bring the rates down," speaking on the sidelines of a securities and regulatory conference.

Shamsi said the meeting would take place soon, but did not elaborate.

The benchmark UAE three month rate was fixed at 2.17 percent on Monday, up from 1.89 percent a month ago. By contrast, the Saudi benchmark was at 0.7675 percent on Monday, and has stayed almost flat.

Monica Malik, chief economist, EFG Hermes, Dubai, said: "The higher (EIBOR) rate reflects both relatively tighter liquidity conditions compared to regional countries, but also concerns about higher counterparty risk."

Commercial bankers said the rise in interbank rates did not appear to be occurring because of any major strengthening of the local economy, which could increase demand for funds.

Instead, treasurers at UAE based banks said there was 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 conglomerate is in talks with banks on delaying payments on about $22 billion in debt linked to its main property units, but has yet to present a formal proposal.

UAE banks have booked provisions for their exposure to Dubai World and related entities over the past quarter, but mostly stayed profitable. However, more provisions remain possible.

The central bank is considering whether to require banks to make provisions against loans to government and state linked firms not directly guaranteed by the state, Emirati newspaper al Ittihad reported on Sunday.

Meanwhile the global financial crisis, as well as Dubai's specific troubles, are limiting access to funds from abroad.

Quotes used to calculate one month EIBOR ranged on Monday from as low as 0.80 percent to as high as 2.20 percent.

Bankers said foreign banks based in the UAE were generally responsible for the lower rates, because they remained able to access some funds from overseas head offices.

A treasury manager of an Abu Dhabi based bank, who spoke on condition of anonymity, said: "Most local banks are quoting on the high side because of their huge lending in the dirhams market, which is not the case with foreign banks."

UAE banks are required to keep their loan to deposit ratios at 100 percent, and in the past, the ratio has been viewed as comfortable when loans have stood at 70 to 85 percent of deposits.

The ratio stood at 104 percent in December, suggesting deposits were unusually scarce, central bank data showed.

Another factor boosting EIBOR is that UAE banks have linked pricing of their loans to EIBOR; this gives them an incentive to push up rates to secure margins if they need to pay more for deposits, another treasurer with a private bank said.

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.

However, commercial bankers said some banks had dropped using EIBOR for lending decisions in favour of their internal benchmarks, so it was unclear whether any fresh change to the system would have an impact on real world loan rates.

The private bank treasurer said: "It's a bit of an awkward situation and it is going to continue for some while, because customer deposits can only increase either through new money coming into the system from some external source, such as the government, or through (economic) growth."

Liquidity injections by the central bank are unlikely at this point, bankers said, as it has already introduced facilities for banks that need cash urgently.

Last November, the central bank set up an emergency liquidity facility that commercial banks could tap if they chose, but no bank is believed to have done so, partly because the money was expensive and partly because banks did not want to be seen as needy.

The central bank has repeatedly in recent weeks that banks are more sound and liquid than they were a year ago, and that there is no need to inject more funds into the system. (Reuters)

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