UAE Central Bank plans official Eibor
The UAE Central Bank said yesterday it was considering setting
inter-bank interest rates to ensure fair dealings among the country's
52 banks and strengthen the largest banking system in the Arab World.
The
bank said it met representatives of the UAE banking sector on Monday to
discuss the establishment of an Emirates Interbank Offered Rate (Eibor)
"under the aegis of the Central Bank".
Analysts said the move
meant the Central Bank would exercise stronger control over financial
operations of the country's 24 national banks and 28 foreign units, and
this could contribute to facilitating movement of liquidity. "The
participating banks supported the idea and showed their commitment to
taking part in this national exercise," the Central Bank said in a
statement.
"The objective of this initiative is two fold -
primarily to set up an official benchmark for dirham offered rate and,
secondly, to facilitate a process whereby the rates fixed are a fair
representation of the prevailing market conditions. The rates should
also reflect the strength of the domestic banking system."
The
Central Bank it would carry on further discussions regarding the
implementation of this project with the panel of selected banks.
"Once
the participating banks and the Central Bank have formalised the regime
for Eibor fixings, the Central Bank will release relevant details,
which will provide full transparency in this respect," it added.
Eibor
is the reference rate most commonly used by borrowers and lenders to
conduct financial transactions in the UAE. Rates have fallen over the
past few months following the measures taken by the Central Bank and
the Ministry of Finance to inject liquidity into the banking sector to
counter the global financial crisis.
In December, the Central
Bank said it was starting offering dirham-US dollar swap facilities
with maturities ranging from one week to 12 months.
"I have not
seen the details of this meeting of the banks, but I think this move is
a sort of stronger Central Bank control on inter-bank rates and a way
to end the link with international rates," said Mohammed Al Asumi, a
Gulf economist. "It could be a good move because it means inter-bank
rates here will not be influenced by other rates such as Libor (London
Inter-bank Offered Rate). This could create a sort of stability in the
UAE's banking system and domestic liquidity."
Another expert
said the current Eibor system in the UAE had long been determined
mainly by Libor and this connection could come to an end once Eibor is
set by the Central Bank.
"This move is a kind of pressure on the
banks to facilitate the movement of money among themselves. I think
that once it is implemented, it will contribute to facilitating
movement of liquidity in the market. It will also curb competition
among banks offering higher rates and this in turn will support efforts
to achieve monetary security and stability in the local market," said
Humam Al Shamma, Financial Advisor at the Abu Dhabi-based Al Fajr
Securities.
The UAE has the largest banking sector in the Arab
World in terms of assets, which stood at Dh1.489 trillion at the end of
June. The 52 banks controlled Dh961 billion in deposits while their
combined loans and advances peaked at Dh1.009trn at the end of June.
The UAE banks have been locked in a drive to consolidate their
financial position to counter the effects of the global crisis and
emerging default problems in the region.
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