6-month Eibor drops to near one-year low

UAE Central Bank. (FILE)

The six-month Emirates Interbank Offered Rates (EIBOR) - the benchmark interest-rate -- has dropped to 11-month low indicating improved liquidity in the UAE's banking system.

On January 5, the 6-month Eibor touched 2.372 per cent, its lowest since February 17 last year when it was 2.371 per cent, according to the latest data by the Central Bank of the UAE.

The one-month Eibor is also at a year-low. On January 5, the one-month Eibor dropped to 1.61 per cent, its lowest since February 8 last year.

However, analysts believe the significant drop in Eibor may not impact banks' lending rates in the UAE, as Eibor is just one amongst the many variables determining lending rates.

"Banks' lending rates can depend on a number of factors, only one of which is the Eibor rate. For example, depending on the currency and other features of a loan, the cost of lending could be linked to foreign currency rates, foreign or domestic treasury rates or to Libor rates. Some loans of course will be linked to EIBOR, and for these the drop in Eibor rates automatically means a reduction in the amount charged to a customer. For other categories of loans, there will be some increase in competitive pressure, but there is no automatic link," Raj Madha, senior banking analyst, Rasmala Investment Bank, Dubai, told Emirates 24|7.

He said corporate lending is much more linked to the interbank rates than retail lending, since corporate lending is much more driven by the cost of funding, while retail lending is much more driven by default rates.

"The fall in Eibor is not going to have an immediate impact on the prices of retail lending. However, certain categories of corporate lending are more closely linked to any decline in Eibor rates," Madha said.

A number of banks in the UAE had replaced Eibor (as a benchmark to determine their cost of lending) with their own internally-set base rate since, as it was argued, Eibor did not truly reflect the cost of lending.

But now as the Eibor has dipped, analysts don't believe banks, which had discarded Eibor, would revert to benchmarking their interest rates against Eibor again.

"The reason why many banks linked their lending rates to their own base rates was largely because it was a lot easier to control their cash flows. I don't think banks are likely to link retail lending to interbank rates unless competition forces them to, which doesn't look like it will be the case at any point in the near future. Base rates may fall a little though as a result of the declines in EIBOR," Madha explained.

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