Regulator to meet banks over rising interest rate

The Central Bank will meet lenders this month to discuss halting a rise in interest rates that officials say threatens to smother an economic recovery.

The Central Bank will meet lenders this month to discuss halting a rise in interest rates that officials say threatens to smother an economic recovery. Banks remain reluctant to lend to each other at low rates, reflecting that liquidity in the banking system is still tight. The Central Bank is worried that this is preventing companies from taking out loans to make investments and create jobs.

The benchmark interest rate used by banks for lending to each other, the three-month Emirates interbank offered rate (Eibor), has risen to 2.2 per cent from 1.8 per cent in the past three months. "Now Eibor has gone back to a higher level and we are watching with concern," said Saif al Shamsi, a senior executive director at the Central Bank Treasury Department. The regulator last year took Eibor rates, which had been set independently by a group of banks, under its oversight. This tighter control helped to reduce the rate from 2.45 per cent in August to less than 2 per cent in December.

But bankers say efforts to lower Eibor have been misguided, because the rate does not reflect the cost of borrowing money. They say true market rates remain higher because of a shortage of liquidity in the financial system, notably for longer-term lending. "For new credit to pick up again, you need to see longer-tenor lending pick up," said Sanjay Uppal, the chief financial officer at Emirates NBD. "When you take up loans, you look at the longer-term funding in your books. You need longer tenors to support that lending ability."

But Mr Uppal said there were enough short-term funds. "A lot of people are comfortable lending at a shorter term." Deepak Tolani, an analyst at Al Mal Capital, said: "The Central Bank can keep focusing on reducing that rate [Eibor], but it won't change the liquidity situation on the ground until banks start lending again. Banks keep saying it does not affect their lending on a day-to-day basis."

Banks are lending to each other at between 1 and 3 percentage points above Eibor rates, said Andre Sayegh, the chief executive of First Gulf Bank. "Liquidity is stretched," Mr Sayegh said. "Some institutions are paying far more [than Eibor] in the interbank market. This should be much lower." Tim Fox, an economist at Emirates NBD, said in a recent research note that "abundant credit growth shows little sign of returning", despite a stabilisation of local money supply.

"Local markets will continue to be dominated by concern that, with local interbank rates creeping up again - a recovery in domestic UAE earnings growth is still some way off," Mr Fox said. "Banks, with limited visibility on the true creditworthiness of customers, appear to have little appetite for increasing the size of their loan book." Analysts say interbank rates are unlikely to fall until liquidity improves and economic confidence returns.

"We will discuss this issue, and where we're going and what we can do to bring Eibor down," Mr Shamsi said of the meeting with banks.