UAE Central Bank sets up Dh50b emergency bank facility

Dubai: The UAE Central Bank on Monday announced a Dh50 billion emergency funding facility for banks to tide over the shortage of funds in the interbank market.

Details of the facility have yet to be released. Total loans and advances in the UAE were Dh894 billion in June, this year. Thus the facility is about 5.6 per cent of the domestic credit market.

The arrival of additional funds from the central bank is expected to ease the availability of funds to a large number of projects in the country.

"There is huge demand for funds in the UAE market and there has been a massive shortfall in the availability of funds in the context of credit squeeze in the international markets. The fund infusion will certainly help ease the shorfall," said Jason Goff," Head of Treasury sales at Emirates NBD.

The new funding facility will be available to banks operating in the country. The central bank has reviewed additional resources to provide support as needed.

Marios Maratheftis Regional Head of Research, Standard Chartered Bank, said: "UAE authorities have the financial strength to add liquidity when needed, and this move suggests that the central bank is seeing the need to provide the market with added liquidity now. Even with liquidity drying up and interbank rates rising, in real terms, interest rates are still significantly negative."

Analysts view this move as similar to those made by major central banks including the Federal Reserve and European Central Bank, which resulted in markets responding positively.

Bankers say that part of the problem is due to the demand for funds being far in excess of its supply. The central bank signalled its concerns over liquidity when it announced on September 15 that it was looking at interbank liquidity very closely. Over the past few weeks, interbank liquidity was tightening, on the back of foreigners reducing their bets for the dirham revaluation and a deteriorating global environment.

According to the central bank, 90 per cent of the inflows related to the currency play have already fled the country.

As a result of the liquidity squeeze, Emirates Interbank Offered Rate (Eibor) rates jumped by approximately 170 basis points to 3.61 per cent from early June to date. Despite the jump, rates remain relatively low.

According to Maratheftis the problem in the UAE is that so far the very loose monetary conditions led to aggressive credit growth. If left entirely up to the markets, the correction in credit growth can be very sharp.

The intervention of the central bank through the provision of the credit facility needs to ensure that any fall in credit growth happens in an orderly way.

Markets are likely to respond positively to the news.

"This is going to be positive for the UAE stock markets as the market players will have better access to funds. It will also lift sentiments on the currency markets and allow the banks to fund their growth-oriented projects much more freely," said Sudhir Shetty, general manager and chief operating officer, UAE Exchange.

Do you expect the Central Bank's decision to increase liquidity in the market? Or will it reduce fund shortage? Should the Central Bank intervene further?