Central bank move eases credit crunch

Interest rates on interbank lending have fallen since the Central Bank created its dollar-dirham swap facility two weeks ago, in a sign that the local credit shortage is easing. In the past two weeks, the Central Bank has allowed banks to swap about US$1 billion (Dh3.67bn) at a rate of Dh3.7 to the dollar through the facility. The measure was designed to allow banks to temporarily exchange dirhams for dollars for a small fee and relieve a shortage of dirhams in the system. Banks can exchange dirhams for dollars with the Central Bank for periods ranging from one week to one year, the bank said.

"The dollar swap facility has been responsible for some additional liquidity in the markets recently, mainly for foreign banks, which have dollar balances to convert to dirhams," said John Tuke, the head of treasury and asset liability and management at Commercial Bank of Dubai. "This has helped the market overall." Shorter-term, interbank rates have fallen more dramatically since the announcement of the facility, with the one-month Emirates interbank offered rate (Eibor) dropping 0.46 percentage points since the announcement of the facility to 3.93 per cent, and the 12-month Eibor falling 0.09 percentage points to 4.15 per cent. However, local interbank rates still stand at more than twice where they were in June, before the credit shortage began to affect the UAE.

The Central Bank asked banks to continue using the swap facility to further lower interbank rates, which rose sharply during the autumn as a result of the international financial crisis. The "Central Bank would like to encourage banks to use the various liquidity-providing facilities offered by it, namely the dollar-dirham swap and the discount facility", it said in a statement. "The wider usage will further push [Eibor] rates down and help the UAE economy in performing to its potential."

Last month, the Central Bank governor, Sultan Nasser al Suwaidi, said that credit growth in the Emirates would slow to 10 per cent or less this year. In September, the Central Bank created a separate Dh50bn facility that allows banks to borrow against the reserves they are required to deposit at the Bank. In October, the Ministry of Finance pledged to inject as much as Dh70bn in long-term deposits with banks. So far, however, only Dh50bn of that has been injected, and bankers say that the funds are still needed to help relieve the credit shortage. "The final tranche from the Ministry of Finance would be welcome now," Mr Tuke said.