Dubai: The UAE Central Bank’s initiative to provide a new lending facility to assist banks which face short-term liquidity shortfalls is the result of regular consultations between the Central Bank and the UAE Banks Federation (UBF), the bankers’ body said in a statement.

The facility, called the Interim Margin Lending Facility, will provide funding on an overnight basis for banks which are able to provide eligible securities and instruments as collateral.

The development of the facility originated from a need to introduce new ways to further strengthen and consolidate the banking sector as a whole.

Mutual committees in UAE Central Bank and UBF had been engaging in regular meetings and subsequent intensive discussions which have focused on the depth of the functional requirements of the UAE banks and the infrastructure to be put in place to manage the new facility by the Central Bank.

Though it is primarily a prudential measure, it is an important additional buffer to help UAE banks manage future financial shocks or funding shortfalls.

“This is another example of the partnership we have with the Central Bank and the contribution we can make reflecting the interests of the UAE’s banking sector. We expect the facility to be drawn upon only rarely, but the fact that such a system now exists helps boost confidence in the banks and those who place their trust in them and in the financial system in the UAE as a whole,” said Abdul Aziz Al Ghurair, Chairman of the UAE Banks Federation.

The facility provides for borrowing which will be charged central bank’s official repo rate plus 100 basis points.

Eligible assets that can be used as collateral include bonds, sukuk and securities issued by the UAE federal government or authorities in individual emirates, as well as banks and corporations based in the UAE.

Securities issued by foreign governments, banks, corporates and supranational agencies will also be accepted as collateral, but must carry a minimum A rating from rating agencies.

A Sharia-compliant version of the Interim Margin Lending Facility for Islamic banks in the UAE is being finalised and will be launched shortly.