Banks are the places people turn to when in need of money or some financial support to reach a particular monetary goal. But there would be times where the bank itself will be in need of money. During the times when there’s a lack of funds, one bank can borrow money from another bank which is financially solid. But the interest rates vary when it comes to interbank loans. And these interest rates in UAE will be decided by a system named EIBOR, which controls and regulates such transactions.
What is EIBOR?
EIBOR stands for Emirates InterBank Offered Rate. This determines the interest rate to be charged by the banks for the loans provided. At times, when these banks fall short of money, they borrow money from the banks which are financially stronger. These Banks which are good financially lend money for some interest rates.
What does it do?
The interest rates offered/to be offered by the banks are determined by the Central bank of UAE. The central bank of UAE has a panel of 10-12 banks. All these banks provide a particular rate which reflects their funds. The central bank calculates an average of the rates by excluding two highest and two lowest rates.
To explain this, let’s consider the following example. Say these are the UAE interest rates provided by each bank for 1 year as on 01/08/2017
|Abu Dhabi Commercial Bank||1.44000(excluded)|
|Commercial Bank Of Dubai||2.09|
|HSBC Bank Middle East||2|
|First Abu Dhabi Bank||1.74000(excluded)|
|National Bank Of Fujairah||2.36800(excluded)|
|Standard Chartered Bank||2.188|
|Union National Bank||2.2|
Then the two highest rates and two lowest rates are excluded and an average of the rest is taken which would be 2.13133 for 1-year tenor. i.e. for a bank borrowing, a certain amount of money will face an interest rate of 2.13% approximately.
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The Eibor UAE interest rates keep changing as they are calculated daily leaving Fridays, Saturdays and national holidays. By 11 am GST, banks on the committee have to provide their rates. If a bank fails to provide a rate, the previous day’s rate would be considered as input. There should be a minimum 8 banks to provide rates every day. In case the number of banks providing the day’s rates falls below eight, the previous day’s rate is taken forward.
These interest rates are not only applicable for inter bank lending process even for the people who want mortgage loan in UAE. The rate of interest will be same but the banks will add some percentage for their own profit. There won’t be any drastic changes in the interest rates. For example in 2015, January it was 0.38% and in June 2015 it was 0.41%. This seems to be very less but it has an impact on loans you take from any banks in UAE who utilizes the EIBOR. Taking part in EIBOR, the participant banks in UAE can impose mutually agreed upon interest rates and it prevents them from overcharging the other.
Tenors which are considered:
6 Months and
Banks which are in the panel as per 2017:
These are the banks which are contributing to EIBOR. The banks which don’t participate in EIBOR have their own interest rates.
- Abu Dhabi Commercial Bank
- Commercial Bank Of Dubai
- First Gulf Bank
- HSBC Bank Middle East
- National Bank Of Abu Dhabi
- National Bank Of Fujairah
- RAK BANK
- Standard Chartered Bank
- Union National Bank
- Arab Bank
The concept of EIBOR has been picked up from LIBOR which stands for London InterBank Offered Rate, which was previously known as BBA Libor – British Bankers Association LIBOR. This is run by British Bankers Association.
In 2012, Libor has experienced a scandal where Barclays Bank did inappropriate submissions of rates and has been fined 290 Million Euros. After this banks like Abu Dhabi Islamic Bank and Standard Chartered Bank had a second thought of being a contributor to EIBOR.
Fortunately, EIBOR is running successfully without any complications till date. Eibor would be a disadvantage for mortgage loan customers, as the mortgage loan interest rates are not fixed. They keep fluctuating. Banks which are not tied up with Eibor will have their own interest rates whereas banks which are contributing to Eibor will add some profit percentage which is mostly 3-5% to the Eibor rate. But when the Eibor rates fall that would be an advantage for the customers.