How are interest rates determined in the UAE?


When you’re looking for a loan, credit card or any other financial product in the UAE, you usually turn to a bank to help you out. But when choosing its always common sense to shop around so you can get the best deal, especially when it comes to interest rates.

Normally, most banks or lenders will offer different interest rates and this is because some banks are tied to the Emirates Interbank Offered Rate, or for short, EIBOR. This is usually what determines how a bank will set its interest rates.

This is not a term that most people come across in their everyday lives, but EIBOR is basically the rate of interest that banks charge to lend money to each other. Other regions have their own version of EIBOR – like in the UK, there is London Interbank Offered Rate (LIBOR). There are times when the bank is in need of funds, and this is when they turn to another bank to help them financially. EIBOR controls and regulates such transactions.

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Now, you may be thinking, how do interbank loans have anything to do with my own transactions as a consumer? The answer is actually a lot.

Launched in 2009, EIBOR is set by a panel of 10 to 12 banks in the Middle East – banks like Abu Dhabi Commercial Bank (ADCB), HSBC, RAKBANK and Emirates NBD, among others. When in need of funds, a bank will borrow from another bank that has excess funds, for which it will be charged interest. The lending banks usually profit from this sort of transaction so they tend to lend without any reluctance. To ensure stability in the market, the rate at which the second banks lends to the first is based on the EIBOR.

The UAE Central Bank sets the rate, publishing the current rate on its website every business day by 11am. The rate is calculated as an average of the UAE banks’ rates – they submit their daily rates and the two highest and two lowest rates are removed and an average is then set.

The EIBOR may change for various reasons – oil prices and US Federal Reserve interest rates, to which the country’s monetary policy is pegged, certainly play their part. Any increase or decrease in rates depends on local market factors and the liquidity in the local market. If the liquidity is tight, the interbank rates go up and if bank deposits are on the rise, the rates tend to go down.

So, back to why it’s important to you as a consumer. The rate is commonly used as a benchmark by lenders for financial transactions, especially mortgages. If the EIBOR goes up, lenders are likely to pass that increase into the consumer. And it works the same if the rate goes down – the drop should be passed on.

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The EIBOR rate is more interesting to UAE homeowners or potential homeowners. The EIBOR rate is also used in some Islamic finance products. Most UAE banks benchmark their variable mortgage rate using EIBOR. When the EIBOR comes down, the lending cost comes down, so there will usually be lower interest rates on credit cards, personal loans and mortgages. In other words, if lending between various banks becomes cheaper, then you as the customer benefit.

But not all banks in the UAE use EIBOR. The UK’s LIBOR, which Emirates Interbank is based on, suffered a controversy back in 2012, when banks were submitting rates that didn’t reflect their true finances. This lack of honesty exposed weaknesses within the system and led to various UAE banks like Standard Chartered Bank and ADCB withdrawing from the panel.

Banks that are not on the EIBOR panel set their own rates. This doesn’t mean their interest rates are higher or lower than the banks which are part of the panel, but it’s always best to check what rate is used to calculate any mortgage or finance.

The bottom line, though, is that, if you have a loan out with a bank that follows EIBOR rates, then it’s likely you’ll be paying more in interest – particularly if you’re repaying a mortgage. But on the other hand, you can benefit from rising EIBOR rates as profits made by banks can be passed on to you in the form of higher interest rates on savings and deposits.

If you want to become a homeowner, click the link to compare and buy the best mortgages offered by UAE banks!

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