UAE changes methodology to calculate key interest rate

The authorities in the United Arab Emirates have changed methodology to calculate a key interest rate in order to better reflect funding costs for banks in the economy. The calculation of the Emirates Interbank Offered Rate, which is a benchmark used by the banking industry to price loans, has been changed to better reflect the true cost of funds.

Abdul Aziz Al Ghurair, the chairman of the U. A. E. Banks Federation and chief executive officer of Mashreqbank PSC said that the calculation of the Emirates Interbank Offered Rate, a benchmark used by the banking industry to price loans, has been "reformulated to reflect the true cost of funds. The authorities have added a new component to the calculation of Eibor to reflect the cost that banks are required to pay to attract deposits from large clients, according to Al Ghurair.

Under the earlier system, the key interest rate only reflected the price banks paid to lend to each other. The change to the calculation method has been agreed to by the central bank and all the lenders. Al Ghurair also said that the Eibor fixing will be evaluated by an independent auditor every quarter in order to ensure transparency.

The Eibor is estimated each day as the average of rates submitted by 11 banks after excluding the two highest and two lowest quotes for every tenor.

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