Lower interest rate helps bank lending

The lending environment in the UAE has improved markedly since the beginning of the year, as the interest rate that banks charge each other to borrow has been brought down. The gap between the UAE three-month interbank rate and the US three-month interbank rate has narrowed to about 124 basis points, the smallest since 2008, according to Bloomberg data. That shows liquidity is improving and banks are in a better shape to lend. This is welcome news for borrowers after the credit crunch . The interbank rate matters because banks commonly use it as a benchmark to price their deposit and lending rates. Increased deposits and numerous bond issues have boosted liquidity in an over-lent financial system, lowering the interbank rate, bankers say. The central bank has also played a role in bringing the rate down, according to the bankers. "As liquidity is returning, we're going back to the normal days," says Mahdi Mattar, chief economist at CAPM Investments. "It's definitely positive for the economy. Liquidity has come back to the system and risk-aversion has eased." Article continues below Political unrest that has swept the Middle East has benefited the UAE, as regional investors have sought a safe haven for their funds. It has also attracted more tourists to the country, boosting the retail sector. As a result, the economy is forecast to grow 3.9 per cent this year from 1.7 per cent last year, the fastest pace since 2008, according to HSBC estimates. Furthermore, UAE companies have also been active in debt capital markets, signalling that investors are more comfortable with their bonds. UAE entities have issued about 95 per cent of the dollar bonds issued in the Middle East and North Africa this year, says HSBC. "There's an equilibrium being restored in the market," says Nick Stadtmiller, fixed-income analyst at Emirates NBD. So far this month, the interbank spread has narrowed much less than the previous month, and the month before, showing that the pace of decline is slowing, according to Stadtmiller. The spread is analysed because the UAE dirham is pegged to the dollar. However, just because it has become cheaper to lend to customers, it does not necessarily mean that banks are lending out, added Mattar.