External deposits enter UAE banks

External deposits began entering the UAE banking system and the absence of a mechanism to determine if they are long-term deposits or just hot money is forcing banks to keep interest rates high as they fear a repetition of crisis, bankers said.

“As long as banks do not have a system to distinguish between long-term deposits and hot deposits, this scenario will continue. Simialrly, external deposits are currently forming a major chunk of deposits,” Arabic daily Al Khaleej quoted Faisal Aqil, General Manager, Personnel Banking at Emirates Islamic Bank, as saying.

Though most banks in the UAE enjoy good liquidity there are some banks that continue resorting to high interest rates as they suffer from shortage of liquidity, sources said.

The last quarter, especially December, is not an indicator to gauge the market as most banks prefer to keep deposits and maintain liquidity until the presentation of annual budgets, the source added.

Mohamed Amiri, Executive Vice-President, Ajman Bank, said the rise in inter-bank interest rates despite improved levels of liquidity was because of a fear of a repetition of financial crisis. “They do not want to take risk with low liquidity. Banks with high liquidity are planning to re-inject it into the market with high interest to get more revenue,” Amiri said.

Most banks in the UAE are keeping their deposits and are not in need of liquidity, he said. Aqil said that the last quarter and December cannot be taken as indicators to measure liquidity in banks as lenders will focus on presenting a healthy annual budget.

Abdullah Al Otaiba, Director, Finance Corporate sector, National Bank of Abu Dhabi,  said banks compete to get deposits, with some paying as high as 200 basis points above Libor to get cash. Competition for deposits by paying high interest rates would negatively affect the banking sector.

Otaiba added the National Bank of Abu Dhabi does not want to enter into competition with those banks due to its strong financial solvency and abundance of liquidity.

Meanwhile, Mahmoud Hadi, General Manager of Systems and Processes, Commercial Bank of Dubai, said high levels of liquidity in the local market is not enough. He called for the need for authorities to pump more liquidity to overcome high interest rates between banks and said majority of deposits in banks are from institutions and government departments.

He said retail deposits with banks is only a small fraction of the total deposits this year.