Yes, interest and profit rates on dirham savings accounts and time deposits are still relatively poor. Depending on the bank and the minimum savings or deposit amount, interest or profit rates can be as little as 0.1 per cent a year and seldom exceed 1 per cent on a normal account. Banks do offer a bigger choice of no-frills online savings accounts with slightly higher, but still not impressive rates.
Other new products include hybrid offerings such as savings plans combined with live insurance policies providing higher returns, like CBD Mustaqbali, a child savings plan with a life insurance policy offered by Commercial Bank of Dubai with a cumulative annual return of 3 per cent if held for at least five years. Similarly, Mashreq’s new Insure+Saver rewards clients who invest a minimum of $25,000 (Dh91,824) in an insurance savings plan and the same amount in a fixed deposit with a return of
4 per cent on the latter – but just for three months after which rates are due for adjustment.
In the mid term, interest and profit rates are set to rise after the US Federal Reserve starts gradually raising US interbank rates, possibly from December this year or from the first quarter of 2016. But a recovery of retail interest and profit will still take time to show, say experts. “The potential rate hike is expected to be at relatively modest levels, hence any impact on savings and deposit rates would be reflective of that,” says Leonardo Castillo, Citi Retail Banking Head for Middle East.
“There are other factors that influence the rate hike, such as liquidity needs of the banking sector and balance sheet management, which creates a competitive benchmark, so it is hard to predict any direct impact.”
At Citi, Castillo observes that clients keep holding their money in ultra-low-yielding savings accounts rather than in time deposits to benefit from the former’s flexibility. Instead of investing in time deposits now, he suggests looking at asset allocation portfolios including mutual funds and stocks.
Renoy Kundukulam, Head of Priority Banking at Noor Bank, is of similar opinion. “The transfer mechanism of higher rates moving from the central bank to the fixed deposit rate offered by retail banks is not instant and certainly not fixed,” he says. “This means banks can take their own time to raise rates they offer on deposits.
“Being cognisant of the rate hikes we would advise clients to park funds either in short-term deposits to benefit from potential future rate hikes or look for variable profit rate deposits or floating rate options that reprice themselves with every rate hike.”
Since the start of 2015, the Emirates Interbank Offered Rate (Eibor) began inching upwards, with three-month Eibor, which started the year at 0.68 per cent moving up to
0.83 per cent so far. However, in the long-gone high-interest environment, the Eibor peaked at 4.73 per cent in 2008.
“But with the Eibor moving up and the expectation of deposit rates moving in tandem, we see investors’ preference tilting towards deposits,” Kundukulam says.
The UAE dirham’s peg to the dollar is also affecting the ability of banks to return to higher interest rates. Lower economic growth and oil prices have had an impact on liquidity flows and profit margins of lenders. “Given the peg of the dirham, a change in rates on the US dollar technically would have the same impact to the dirham yield curve translating from the swap rates of AED/USD,” says Tooran Asif, Head of Personal Banking at Mashreq.
“However, the interest rate a bank is willing to pay is determined by other factors including the liquidity position and not necessarily the benchmark rates. Prevailing rates are beyond the control of a client,” he adds.