Banks may cut rates as cost of their funding declines
Banks in the country are enjoying the benefits of a substantial drop in the cost of their funding with the Emirates Inter-Bank Offered Rate (Eibor) witnessing a decline in the second half of 2009. If and when they pass on the rate cut to end-consumers, borrowers in the UAE can look forward to cheaper credit.
Already, Mashreq Bank has announced a cut in its prime rate to 6.25 per cent, according to the bank's website. Even though a more widespread reduction in lending rates is yet to be witnessed, analysts maintain other banks could follow suit.
"Reduction in prime rate indicates that a bank has sufficient funds and it can go to the market and start lending. Even though we are yet to hear UAE banks start doing that, any such move would benefit borrowers," said Germaine Benyamin, Senior Analyst at HC Brokerage.
Eibor started to ease in the third quarter of 2009 but has not had the desired impact on interest rates on loans and mortgages, which have continued to remain high.
As the market continues to witness the changes in inter-bank rates and further easing of liquidity, however, banks are likely to act in the direction of reducing their interest rates. "Other banks may follow suit although they would need to look at a host of other factors like asset quality," said Benyamin.
However, lending activity could still take a while to pick up. "They [the banks] will start lending once we see more clarity on the economic environment," said Raj Madha, an independent analyst.
Although Eibor is used as a benchmark by most banks, especially for mortgage rates, of late many banks have moved to their own benchmarks, known as prime rates or base rates.
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