UAE Central Bank may intervene to reduce Eibor

UAE-Central-BankThe analysts have expressed that there is a little chance for a plunge in Interbank borrowing costs to a level more reflective of market lending rates until liquidity improves and economic confidence returns.

There has been a steady rise over recent months in the Emirates interbank offered rate (Eibor), the interest rate banks charge when they lend to one another, to reach its highest level since last October.

Usually, this measure is used as the basis for interest on loans, including variable-rate mortgages.

Eibor is still not in line with their cost of borrowing money; complain some banks, in spite of the rise. They feel that a shortage of liquidity in the financial system might maintain a hike in the market rates.

Janany Vamadeva, a banking analyst at HC Securities in Dubai, said, "Eibor will not generally reflect market rates until liquidity get backs to normal."

Since the banks look to maximize profits and build up enough capital to protect themselves against non-performing loans; so the cost of borrowing remains high for customers.

Furthermore, since banks passed on the extra costs of funding to their customers; there has been a hike in the price of borrowing during the global financial crisis.

The regulator would consult with commercial banks on how to set Eibor in the latest effort, said Saif al Shamsi, the senior executive director at the Central Bank's treasury department last week.