Emirates Interbank Offered Rate (EIBOR)

Demystifying the Emirates Interbank Offered Rate (EIBOR)

What Is the Emirates Interbank Offered Rate (EIBOR)?

The Emirates Interbank Offered Rate, commonly known as EIBOR, stands as the benchmark interest rate denominated in UAE dirham, governing lending transactions between banks within the United Arab Emirates (UAE). This rate plays a pivotal role in shaping financial transactions across Dubai and neighboring Emirate kingdoms, influencing loans such as mortgages, personal loans, and car loans.

Key Takeaways

• EIBOR is a synthetic benchmark interest rate derived from rates offered by major UAE banks for short-term loans.
• Calculated daily by the Central Bank of the UAE, EIBOR serves as a reference for market interest rates and influences other interest rates in the region.
• Reforms in 2018 aimed to enhance transparency and accountability in the calculation and publication of EIBOR.

Understanding the Emirates Interbank Offered Rate (EIBOR)

Much like the London Interbank Offered Rate (LIBOR), EIBOR represents an average of rates offered by major UAE banks for short-term funding to other banks. It serves as a reflection of the average interest rates at which UAE banks provide unsecured funds to other banks in the UAE dirham wholesale money market.

EIBOR signifies the average market interest rate for short-term bank borrowing and liquidity management in the interbank market. It dictates transaction prices for mortgages, consumer loans, and Islamic finance products. Until April 15, 2018, the United Emirates Central Bank directly calculated this rate, but afterward, the task was outsourced to Thomson Reuters Ltd.

The rate is determined each business day at 11:00 a.m. local UAE time, excluding Fridays and Saturdays, across various tenors ranging from overnight to 12 months. Many Islamic banks employ EIBOR rates as benchmarks for ijara agreements, akin to installment leasing contracts.

Changing Interbank Rate Calculations Worldwide

In 2018, the Central Bank of the UAE revamped the calculation and reporting methodology of EIBOR, introducing stricter recordkeeping and oversight to ensure accuracy and transparency. This move aligns with global efforts to reform key interest rates following the LIBOR fixing scandal in 2012.

According to a November 2020 announcement by the Federal Reserve, banks are urged to phase out contracts utilizing LIBOR by the end of 2021. The Intercontinental Exchange, responsible for LIBOR, will cease publishing one-week and two-month LIBOR after December 31, 2021, with all contracts using LIBOR to be concluded by June 30, 2023.

In the UAE, the number of contributing banks decreased from ten to eight, prompting interest in alternative benchmarks. Under the revised system, contributing banks are required to substantiate their submissions based on economic and financial factors, with the highest and lowest contributions discarded before averaging.