Dubai: The UAE Central Bank on Sunday set up a facility to support liquidity in the banking system, saying it "stands behind" local and foreign banks operating in the country.

The announcement came three days after the Dubai government sought a standstill until May 30 on all financing for two of its flagship firms.

A WAM report said the Central Bank has issued a notice to UAE banks and branches of foreign banks operating in the country, making available to them a special additional liquidity facility linked to their current accounts at the Central Bank, at the rate of 50 basis points above the three months Emirates Interbank Offered Rate (Eibor).

Support system

The move is aimed at supporting the banking system should there be a liquidity shortage in view of the current situation, analysts said.

The Central Bank stated that the UAE banking system is more sound and liquid than a year ago.

The UAE banking system comprises retail commercial banks only, with a strong base of stable deposits.

The Dubai Government's Department of Finance on Wednesday said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to a delay on repayments as the first step to restructuring.

John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh, said: "This will support the liquidity and the overall soundness of the banking system in the UAE and especially in Dubai. The Central Bank is sending a strong message to everyone that they are providing ample liquidity and guarantee to banks in the UAE."

Dubai World had $59 billion (Dh216 billion) of liabilities as of August and repayment of Nakheel's $3.5 billion worth of Islamic bonds was widely expected by the market to be met.

The UAE Central Bank held meetings with senior Dubai officials to discuss the latest situation on Saturday, a senior official, who did not want to be identified, told Gulf News.

Economists and analysts say the country's economy is strong enough to overcome the current short term challenge.

Absorb potential stress

John Tofarides, analyst at Moody's Middle East Ltd, said: "If the repercussions remain confined to exposures to Dubai World and Nakheel, and based on current assumptions and expectations, UAE banks are likely to be able to absorb potential stress."

Peter Sands, Group Chief Executive of Standard Chartered, said: "The UAE Central Bank has acted decisively and pragmatically in announcing new liquidity measures today.

"Their support for the banking system will underpin consumer and market confidence in the economy. We are confident that Dubai and the UAE as whole will work through these issues and continue to prosper as a dynamic and vibrant part of the world."

- With inputs from WAM and Reuters