The owner of a small business has any number of variables that could derail his cash flow and affect his profits. Everything from the weather to new road construction, the sudden introduction of parking meters to fluctuating exchange rates can deter customers with money in their pockets. Small business owners, the lifeblood of any economy, must be flexible. But there is one area where they might expect some certainty: in their borrowing costs.
Most loans in the country are based on Eibor, the Emirates Interbank Offered Rate, a reference set by the Central Bank of the UAE based on the interest rates that banks charge each other. A few months ago the Central Bank decided to revise the way that it calculated the figure. Although the three-month Eibor rate has dropped to below 2 per cent from 4.8 per cent in October 2008, some businesses continue to complain that interest rates charged by banks are too high.
Some banks, notably Mashreqbank, Barclays and Habib Bank, have responded by dropping Eibor and changing the terms of their loans. Home loans and corporate lending fees have increased. Other banks are sure to follow suit. This is contrary to global trends, where lower interest rates are encouraging both businesses and individuals to start borrowing again. Yes, banks are benefiting and rebuilding their capital bases, as they should, but in most cases they are passing on these combined lower rates to the consumer.
A local banker might argue that it makes sense to charge more for loans. Too little concern was shown to risk over the past few years, and now we are all paying the price. However, small businesses and home buyers need to be nurtured by their lenders in order for sustainable growth to take hold. It was short-term thinking - borrowing short and lending long - that contributed to the credit crunch. Bankers are guilty of compounding the problem by moving the goal posts. The economy needs stimulating, not throttling, and certainly not by many of the bankers who put it in jeopardy in the first place.
Yesterday Tamweel, the country's largest Islamic home lender, cut its lending rates by 0.5 per cent. This is a welcome trend, and one we would urge the rest of the country's lenders to follow.