United Arab Emirates interbank offered rates do not reflect true market lending rates and the central bank will consult with commercial banks on how to reduce them, a central bank official said.

However, commercial bankers said traded rates were only likely to drop if deposits increased.   

EIBOR rates, based on quotes provided by a dozen banks, have been edging up in recent weeks, touching six-month highs, as banks chase deposits they need for longer-term funding and as offshore credit has dried up because of uncertainties over Dubai's debt restructuring.

"It does not reflect true market rates, so this is going to be discussed thoroughly at our next meeting with commercial banks," Saif Hadef Al-Shamsi, senior executive director at the central bank's treasury department, told Reuters.   

"There are some demands from banks and the central bank will come up with some proposals at the next meeting on how to bring the rates down," he said on the sidelines of a securities and regulatory conference.   

Al-Shamsi said the meeting would take place soon, but did not elaborate.

The benchmark UAE three-month rate was fixed at 2.17 percent on Monday, up from 1.89 percent a month ago. By contrast, the Saudi benchmark was at 0.7675 percent on Monday, and has stayed almost flat.

"The higher (EIBOR) rate reflects both relatively tighter liquidity conditions compared to regional countries, but also concerns about higher counterparty risk," said Monica Malik, chief economist at EFG-Hermes in Dubai.

Commercial bankers said the rise in interbank rates did not appear to be occurring because of any major strengthening of the local economy, which could increase demand for funds.

Instead, treasurers at UAE-based banks said there was a reluctance to lend funds for periods of over one month; lenders do not want to have their funds locked up for longer because of concern about exposure to debt-laden Dubai World.

UAE banks have booked provisions for their exposure to Dubai World and related entities over the past quarter, but mostly stayed profitable. However, more provisions remain possible.

The central bank is considering whether to require banks to make provisions against loans to government and state-linked firms not directly guaranteed by the state, Emirati newspaper al-Ittihad reported on Sunday.  -Reuters