DUBAI: The United Arab Emirates central bank said on Thursday it was working with the finance ministry to find a way to reduce interest rates charged by banks on corporate deposits, which have been rising in recent months.
Central bank governor Sultan Nasser al-Suweidi did not give details of the plan, which he said could also push down interbank interest rates in the Gulf state that remain relatively high compared with other states in the region.
Competition among lenders in the second-largest Arab economy to keep corporate customers has prompted banks to raise rates on deposits amid a liquidity shortage, bankers have said.
We are working with the Ministry of Finance to put a scheme in place to reduce the interest rate of corporate-to-bank deposits by breaking the vicious circle and rigidity that have developed as a result of the liquidity crisis, Suweidi said at a bankers meeting in Abu Dhabi.
We believe the scheme that we intend to put in place soon for corporate-to-bank deposits will also influence the interbank rate and will eventually bring it down, he said in a speech, a copy of which was obtained by Reuters.
The one-month Emirates Interbank Offered Rate was 3.09375 percent on Thursday, having fallen from levels above 4.4 percent in December as the central bank slashed interest rates and introduced a dirham-dollar swap facility.
The central bank and finance ministry have launched 120 billion dirhams ($32.67 billion) of funding facilities for banks since September to unlock credit markets.
Suweidi reiterated that monetary policy would continue to be geared to maintain low official interest rates and achieving low-single-digit economic growth in the coming years.
UAE banks have posted sharp declines in profit and some recorded losses in the fourth quarter as they took provisions for bad loans and wrote off the value of investments.
The sector has been hit by a real estate downturn in Dubai, where residential property prices have fallen, on average, by 25 percent since a peak last year, Morgan Stanley said this month.
Even if bank assets are of good quality, in crisis time banks would need to put aside provisions for their investments that have gone down in value, he said.
The circumstances have left banks short of liquidity to extend new loans. Suweidi said gross loans and advances at the end of January exceeded customer deposits by about 116 billion dirhams – a gap currently being bridged through bank capital and reserves.
This situation is not appropriate and now we are working on bridging this gap, Suweidi said, without elaborating.
The governor said mortgage loans in the UAE amounted to 17.8 percent of the gross domestic product, compared with 86 percent in Britain and more than 100 percent in the United States.
Real estate loans by UAE banks – including mortgage loans, loans to companies and loans to real estate developers – were worth 172.74 billion dirhams on Dec. 31, he said.
He added that the decline in property prices was psychological and sometimes the result of a lack of availability of bank loans. Rents in the Gulf state, meanwhile, were due to come down gradually .
