Borrowing costs for banks keep climbing

Inter-bank lending rate has doubled since June, which will hit consumers sooner or later, say analysts.

The cost of borrowing continues to rise, despite efforts from the Central Bank to loosen the liquidity squeeze. As banks find it increasingly difficult to secure short term loans, nearly all residents will soon feel the effects of the higher inter-bank lending rates, analysts say. The Emirates Interbank Offer Rate (Eibor), which tracks how much banks are charging each other for short-term loans, climbed to 4.52 yesterday, more than double where it stood in June. Since most mortgages and credit card accounts in the country are pegged to Eibor, many consumers will have to start paying higher fees.

The London Interbank Offer Rate (Libor) has also risen sharply in recent weeks amid growing uncertainty in the western financial system, climbing to 4.29 yesterday. In the GCC, only Kuwait's interbank lending rates fell yesterday after the government deposited billions of dollars with local banks, Reuters reported. The Kuwait Inter Bank Offer Rate (Kibor) dropped to 4.25 per cent, down from 4.88 on Sept 25.

The dramatic rise in Eibor has caused some to wonder whether the UAE banking system may be facing deep problems similar to those in the West. Worries that the UAE banking system may be hiding maladies comparable to those in the US and Europe have caused international investors to sell their stakes in the Gulf, sending stock markets down. "International investors are seeing the same symptoms in the UAE right now as they are seeing in the West," said Mahdi Mattar, the chief economist of Shuaa Capital. In other words, they fear that banks in the Gulf are in the same situation as their counterparts in America and Europe.

However, according to Giyas Gokkent, an economist at the National Bank of Abu Dhabi, the Gulf economies are better off. "I don't think it's anything comparable to what's happening in the US. The macro context is completely different," he said. The real problem was that the UAE banking system was heavily dependent on external funding before international liquidity dried up, he said. Now, it must look internally to replace those funds. As the demand for local funding goes up, so do prices.

Additionally, the banking system has experienced a growth in loans that went unmatched by a growth in deposits. The banking sector's loans increased 49 per cent in June from a year earlier, whereas the deposits increased only 36 per cent, according to Shuaa Capital. "Loans have surpassed deposits, leaving a funding gap," said Mr Mattar. "In the past, banks used to issue bonds or sukuk to close that funding gap. Now, with the current credit crunch, they cannot issue bonds because there is nobody to buy them," he said. "It is not a confidence problem in the UAE as it is in Europe and the US, in other words, it's a short-term liquidity squeeze and not a credit problem."

Others disagree, and say that banks in the Gulf may be overexposed. "What do you call it when a bank has issued too many loans compared to deposits? I call it a risk of default," said an economist who requested anonymity. "If these were normal circumstances, you could look for funding on the open market, but since these are not normal times, banks that have a mismatch between loans and deposits will find it difficult to fund their exposure. Eventually, a bank may have to resort to emergency measures, or ask the Central Bank for help."

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