Cen­tral Bank of the UAE makes Ei­bor more ac­cu­rate

The National - News - - BUSINESS - MAH­MOUD KASSEM

The Cen­tral Bank of the UAE has put in place a new way of cal­cu­lat­ing the UAE In­ter­bank Of­fered Rate, or Ei­bor, that will bring about more ac­cu­rate and trans­par­ent pric­ing in the way in­ter­est rates are used by banks to price ev­ery­thing from mort­gages to car loans.

It comes as reg­u­la­tors the world over tighten over­sight of rates in the wake of the Li­bor scan­dal, in which some banks ma­nip­u­lated rates for their own ben­e­fit. A cen­tral bank rep­re­sen­ta­tive con­firmed the new cal­cu­la­tion started on Sun­day.

“We see it in the context of the move glob­ally. In terms of set­ting bench­mark rates, reg­u­la­tors are mov­ing to an area in­stead of banks giv­ing an ap­prox­i­mate of what they think but based on ac­tual trans­ac­tions,” said Bi­lal Khan, Dubai-based se­nior econ­o­mist at the emerg­ing mar­ket spe­cial­ist bank Stan­dard Char­tered.

“So in that way I think it just in­creases trans­parency around bench­mark in­ter­est rates.”

The Li­bor – or Lon­don In­ter­bank Of­fered Rate – rig­ging scan­dal erupted in 2012 when au­thor­i­ties in the United King­dom and the US be­gan in­ves­ti­gat­ing in­ter­est rate ma­nip­u­la­tion that im­pli­cated some of the world’s big­gest banks, in­clud­ing UBS and Bar­clays, both of which were sub­se­quently fined.

Since then, cen­tral banks have in­creased over­sight of the way bench­mark rates are cal­cu­lated by banks. At the same time, in the UAE, a more trans­par­ent method for cal­cu­lat­ing Ei­bor is likely to give those who want to bor­row and those who want to lend more con­fi­dence in do­ing so. This is es­pe­cially timely, as credit growth re­mains lack­lus­tre in the wake of the three­year oil slump. A spokesman for Thom­son Reuters, the news and in­for­ma­tion provider, con­firmed that as the of­fi­cial cal­cu­la­tion agent it went live with the new Ei­bor on Sun­day. A panel of eight banks will con­trib­ute ini­tially to Ei­bor and the rate will be based on Reuters’s method­ol­ogy pro­ce­dures aligned to the In­ter­na­tional Or­gan­i­sa­tion of Se­cu­ri­ties Com­mis­sion Prin­ci­ples for Fi­nan­cial Bench­marks, Thom­son Reuters had said in March. “The UAE has seen sig­nif­i­cant de­vel­op­ment and growth in their fi­nan­cial mar­kets in re­cent years,” said Nadim Na­j­jar, Reuters man­ag­ing di­rec­tor for the Mid­dle East and North Africa, at the time. “This ap­point­ment re­in­forces Thom­son Reuters com­mit­ment to work­ing with UAE fi­nan­cial in­sti­tu­tions to de­velop mar­ket in­fra­struc­ture, ul­ti­mately in­creas­ing trans­parency, build­ing greater con­fi­dence amongst in­vestors and reg­u­la­tors, and en­sur­ing strong gov­er­nance pro­cesses.”

Be­fore Sun­day’s change, the Ei­bor rate was re­ported by 10 banks and fixed at an av­er­age rate that ex­cluded the two high­est rates and the two low­est rates. Banks lend to each other on an overnight, one week, one month, three-month, six-month and one-year ba­sis. Ab­du­laziz Al Ghu­rair, the head of the UAE Banks Fed­er­a­tion and chief ex­ec­u­tive of­fi­cer of the Dubai lender Mashreq, said in March that the pre­vi­ous pric­ing of longer-term in­ter­bank rates did not re­ally re­flect real rates, be­cause the ma­jor­ity of lend­ing be­tween banks is for pe­ri­ods not more than one month.

“In the past, it was a lit­tle old-fash­ioned and the Ei­bor pric­ing was us­ing the in­ter­bank rate,” he said. “The new mech­a­nism, which the cen­tral bank has ap­proved, will be used as the cost of de­posits that banks are hav­ing and a big el­e­ment of that is the in­cre­men­tal cost of de­posits, be­cause we dis­cov­ered that the in­ter­bank rate, 90 per cent of the in­ter­bank is one month or less. No bank will lend to an­other bank for six months. So it is a fake mech­a­nism used to stip­u­late the cost of in­ter­bank.”

The UAE has seen sig­nif­i­cant de­vel­op­ment and growth in their fi­nan­cial mar­kets in re­cent years NADIM NA­J­JAR Reuters man­ag­ing di­rec­tor, Mena

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