Interest rate in the UAE declining from 2012 levels

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Interest rate in the UAE

Over the past few years, the UAE’s banking sector has become awash with liquidity because of record low interest rates at the US Federal Reserve and a tide of deposits from countries affected by unrest such as Tunisia, Egypt and Syria.

That has sent the Emirates Interbank Offered Rate (Eibor) falling steadily for the past four months to historic lows. The benchmark interest rate in the UAE was last recorded at 1 percent. Interest Rate in the UAE is reported by the Central Bank of the UAE.

The UAE Central Bank is obliged to track the equivalent US dollar interbank rate because of the dirham’s peg to the greenback. Eibor is unlikely to increase sharply until the Federal Reserve lifts its interbank rates.

Historically, from 2007 until 2013, the Interest Rate in the UAE averaged 1.36 Percent reaching an all time high of 4.75 Percent in November of 2007 and a record low of 1 Percent in January of 2009. In the UAE, the interest rates decisions are taken by the Central Bank of the United Arab Emirates. The official interest rate in the UAE since November 2007 is overnight repurchase rate. This page includes a chart with historical data for the Interest Rate in the UAE.

The interest rate in the UAE shown on this page refer to the central bank benchmark interest rate. Usually, the central bank benchmark interest rate is the overnight rate at which central banks make loans to the commercial banks under their jurisdiction. Moving the benchmark interest rate, the central bank is able to make an impact on interest rates of commercial banks, inflation level of the country and national currency exchange rate. Reduction of interest rates should bring increase in business activity, a rise in inflation rate and weakening of national currency. In case of increase in interest rates the level of business activity is likely to drop, inflation declines and national currency strengthens.

Investors want better returns than the Interest rate in the UAE

Investment options are sparingly few with the interest rate in the UAE down even more this year. A few investment options are Deposits, e-saver account and savings account. You can knock off savings account from the list, as they offer a negligible interest rate in the UAE.

The interest rate in the UAE has also been decreasing by the month. Rates have dropped by almost 50 basis points in the last 1-year. There could be two basic reasons why interest rates are falling. The first is that there is a huge influx of foreign funds from the Arab subcontinent and European countries. The instability & economic recession in these countries make UAE a safe haven for investment. Secondly, Central Bank has limited the investment avenues for Banks in UAE. The new restriction on LTV cap on mortgages could potentially reduce the interest rates even further.

HSBC is offering an interest rate in the UAE of 1.8% p.a. on a fixed deposit for 6 months, while Mashreq Bank is offering only 0.22@ p.a. for the same period. Commercial Bank International is offering 1.5% p.a. on a 1 year deposit of only AED10,000 while Emirates NBD is offering 1.75%  p.a. for a 1 year deposit of 4 million and above. While Islamic Banks have yet to declare the profit rate for the last quarter of 2012, Dubai Islamic Bank declared a profit of 1.69 % p.a. for a 1-year deposit vis a vis 0.8% p.a. profit declared by Emirates Islamic Bank for the same period. Clearly Dubai Islamic Bank, Commercial Bank International, Noor Islamic Bank & HSBC are the market leaders for deposits currently.

The low interest rate in the UAE also seems to encourage residents to invest in Millionaire schemes like Mashreq Millionaire & Al Awwal Certificates. Residents are willing to forego the small, assured interest for a chance to win a million dirhams. The reality is there are much better ways to beat the low interest rate in the UAE offered by banks.

Ways to beat the interest rate in the UAE

One such option is to invest in offshore multi-sector fixed income bond funds such as the Loomis Sayles bond fund. This bond fund has been giving an average growth of 8% per annum for the past 10 years. If the investor invests in this fund through a Lump sum investment product such as Generali Choice, he/she can easily beat the low interest rate in the UAE that may continue to fall.

What are your thoughts on this article? please feel free to comment below.

About the author

Amit is an Independent Financial Advisor, based in Dubai since 1997. He is part of the prestigious ‘Million Dollar Round Table’ (MDRT), which is an elite club of the best financial advisors worldwide.

He has authored the ‘6-Step Financial Success Guide’, and the book ‘Creating, Preserving, Distributing Wealth’.

He helps business owners and professionals ‘Create A Second Income’ through investments.

Amit Mitbawkar

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