The UAE's central bank expects interbank offered rates to fall further and plans to introduce a repurchase facility for Islamic lenders in the coming months, its treasury head said.

The central bank has been urging banks to quote lower rates at daily fixings of interbank benchmarks as liquidity in the system improved following Dubai's $25 billion debt restructuring deal last September.
   

"Banks have no liquidity issue," Saif Hadef Al-Shamsi, senior executive director at the central bank's treasury department, told reporters on the sidelines of a financial conference in the UAE capital.

"Because of the surplus of liquidity that is available now, banks have reduced (rates) and I would expect this reduction to continue in the EIBOR rates along the curve."    

The main UAE three-month interbank offered rate was set at 1.96 per cent at Tuesday's fixing, the lowest level since January 2010, approaching levels of around 1.9 per cent before the Dubai debt crisis hit in November 2009.

However, the rate, down from levels of around 2.4 per cent seen in July 2010, is still well above the Saudi benchmark at 0.74 per cent. EIBOR rates are based on quotes provided by a dozen banks.

A rise in foreign deposits in the UAE due to political unrest in the region had also helped push interbank rates lower.
 However, despite improved liquidity, lending in the world's No.3 oil exporter is still slow to pick up.

Asked whether the UAE saw increased capital inflows as a result of social unrest sweeping the Arab region since December, Shamsi said: "The increase for non-resident deposits is about 20 to 30 billion (dirhams) for the last six months."    

"It increased to around 80 billion. If you say the money is coming in, the UAE has a very good infrastructure in terms of encouraging investment," he said.

Shamsi also said the central bank planned to introduce a repurchase facility for Islamic banks in the country after launching auctions of Islamic deposit certificates last year.

"Now we are working on creating a mechanism for Islamic banks ... to do the repo. It will be there I would expect probably within the coming one or two months," he said.

A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, which has close to $1 trillion worth of assets globally. - Reuters