Abu Dhabi: UAE banks are still lending to each other at almost three times the cost in Saudi Arabia for three-month loans, even one month after the central bank set new guidelines for the calculation of the Emirates Interbank Offered Rate (Eibor) and began publishing it online.

As of yesterday, three-month Eibor stood at 1.96 per cent compared with 0.77 in Saudi Arabia. The UAE one-year rate recorded 2.44 per cent compared with 1.33 in the kingdom.

Analysts say the persistence of high interbank lending rates in the UAE means liquidity remains tight in the local banking system.

"If [banks] have extra money at the end of the day, they will lend it out," said Deepak Tolani, vice-president of equity research and banking analyst at Al Mal Capital. "If they don't have excess liquidity, they will hold it dear. They will not lend it out at cheap rates for other banks to actually go out and make loans."

Still, the UAE three-month rate has now stabilised at its lowest level since June 2008. The rate had hit a record of more than 4.4 per cent in November 2008 as liquidity dried up with the onset of the global financial crisis.

Eibor is the average rate of interest at which UAE banks lend money to each other in the short term (overnight to one year). The rate varies depending on the term of the loan, but the overnight and three-month rates are often used as benchmarks for a particular market.

New system

In early August the Central Bank said it would raise the number of participating banks used to calculate that average from eight to 11 and disregard the top and bottom two rates each day. The new system was implemented in the beginning of October.

The regulator also said it would hold a "conversation with banks about whether their advertised rates really reflect market conditions," according to a statement by Saif Al Shamsi, Central Bank spokesman and Treasury Department senior executive director.

At the time of the announcement, three-month Eibor stood at 2.24 per cent, compared with 0.64 in Saudi Arabia.

"Eibor has remained relatively stable over the past month, pointing at little change in terms of liquidity on the market," said Delphine Arrighi, Middle East and Africa senior rates strategist at Standard Chartered. "As we get closer to the end of the fiscal year, we might even see some slight upward pressures as banks get tempted to increase their rates to attract more deposits and improve their balance sheet."

According to yesterday's published rates from 12 banks, Abu Dhabi Commercial Bank (ADCB) and Emirates NBD reported the highest three-month rates at 2.45 per cent. Citi Bank and HSBC reported the lowest at 1.45 and 1.5 per cent, respectively.

Tolani said the large disparity likely reflects the financial positions of the banks as ADCB and Emirates reported loan to deposit ratios of 143 per cent and 118 per cent at the end of the third quarter.

He said it will likely take some time before interbank rates fall to match their counterparts across the border.