U.A.E. Changes Interbank Rate Calculation to Reflect Bank Costs

  • Rate now includes costs of deposits from large clients
  • Previous rate reflected cost of banks lending to each other

The United Arab Emirates has altered the way it estimates a key interest rate to better reflect funding costs for banks in the second-biggest Arab economy.

The calculation of the Emirates Interbank Offered Rate, a benchmark used by the banking industry to price loans, has been “reformulated to reflect the true cost of funds,” Abdul Aziz Al Ghurair, the chairman of the U.A.E. Banks Federation and chief executive officer of Mashreqbank PSC, told reporters in Dubai on Monday.

A new component has been added to Eibor to reflect what banks actually need to pay to attract deposits from large clients, Al Ghurair said. The previous system mainly reflected the price banks paid to lend to each other. The change is already in place after it was agreed to by the central bank and all the lenders, he said.

The Eibor is estimated every day as the average of rates submitted by 11 banks, including the local units of HSBC Holdings Plc and Standard Chartered Plc, after excluding the two highest and two lowest quotes for every tenor. The three-month Eibor has risen six basis points in 2016 to the highest in three years following a decline in crude prices in the past two years that’s curbed liquidity and slowed deposit growth. It was quoted at 1.11 percent on Monday.

To ensure transparency, the Eibor fixing will be evaluated by an independent auditor every quarter, Al Ghurair said.

SME Defaults

The problem of a growing number of expatriate owners of small and medium-sized companies fleeing the country after defaulting on loans “has been contained” after the U.A.E. Banks Federation announced a 90-day moratorium for them, Al Ghurair said.

The Federation in March said the country’s 49 banks had agreed not to initiate legal and criminal action for 90 days against small and medium-sized companies facing loan-payment difficulties. Banks would instead coordinate drawing up standstill agreements, a restructuring plan and information sharing within that period to determine how best to manage clients’ indebtedness.

The new initiative helped “stabilize SMEs,” he said. “It has stopped customers skipping. Some of them are volunteering, let me work out a solution. It is a mini-bankruptcy law.”

The U.A.E. has no bankruptcy law and individuals can be imprisoned for bounced checks, which leads many defaulters to flee the country.

Al Ghurair said he expected U.A.E. bank lending to rise by 2 percent to 3 percent this year as falling commodity prices curb loan demand. Bank lending grew by 7.8 percent last year.

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