EIBOR and the UAE Economy: Understanding the Impact of this Key Financial Indicator

Introduction:

In today’s financial world, the Emirates Interbank Offered Rate (EIBOR) is very important, especially in the United Arab Emirates (UAE). The UAE’s interest rates on loans, mortgages, and other financial products are partly based on the EIBOR, an interbank lending rate. EIBOR is also used as a standard for many financial transactions and is important for the country’s economic growth. We will cover how EIBOR work and why it is important in this blog. Whether you’re a finance professional or interested in learning more about finance, this blog will provide valuable insights into this essential financial benchmark.

What is EIBOR?

EIBOR also called the Emirates Interbank Offered Rate, is the average interest rate that UAE banks offer to other banks in the UAE interbank market when they lend unsecured funds.

EIBOR is calculated every day based on what a group of banks from the UAE’s banking system have to say. The rates are given as a percentage per year and are available for terms ranging from one day to one year.

EIBOR is a key reference rate for loans, mortgages, derivatives, and other financial transactions. EIBOR is the standard rate banks use to set the prices of loans and other financial products. This rate is widely used in the UAE financial industry.

How does EIBOR work?

The UAE Central Bank calculates EIBOR daily based on what a group of banks representing the UAE’s banking system says. The panel is made up of banks with good credit that are active in the UAE interbank market.

The panel gives the UAE interbank market their rates for lending money to other banks. From lowest to highest, the submissions are ranked, and the middle 50% are used to figure out the EIBOR fixing.

For example, if there are ten submissions, the lowest and highest are thrown out, and the remaining eight are ranked. The EIBOR fixing for that day is found by taking the average of the fourth and fifth submissions.

What is the point of EIBOR?

EIBOR is an important part of the UAE’s financial market because it helps banks determine how much it costs to borrow money and how much financial products cost for consumers. EIBOR is an important reference rate in the UAE because it affects the interest rates on loans, mortgages, and other financial products.

EIBOR is also used as a standard for futures contracts, options, and swaps. These derivatives are important tools for managing risk because they allow investors to protect themselves against changes in interest rates.

The UAE Central Bank also keeps a close eye on EIBOR because it shows how liquid the banking system is and how well the economy as a whole is doing.

How is EIBOR used in financial transactions?

In many financial deals in the UAE, EIBOR is used as a standard interest rate. For example, if you apply for a loan in the UAE, the interest rate you’ll be given will be based on EIBOR.

The UAE’s bond, derivatives, and other financial instruments are also priced using EIBOR.

EIBOR and the UAE economy

Financial market participants, economists, and policymakers in the UAE all carefully watch the Effective Interbank Offered Rate (EIBOR). The UAE Central Bank uses EIBOR to set the country’s monetary policy, and changes to EIBOR can have big effects on the UAE’s economy.

For example, if the UAE Central Bank raises interest rates, EIBOR will also increase. This will make it more expensive for businesses and consumers to borrow money. This can slow down economic growth because it makes it harder to get credit and costs more to borrow money.

On the other hand, if the UAE Central Bank lowers interest rates, EIBOR will also go down. This will make it cheaper for people and businesses to borrow money. This can help the economy grow because it makes more credit available and cheaper to borrow.

Advantages of EIBOR

The fact that EIBOR is a clear benchmark interest rate is one of its benefits. Anyone can see how EIBOR is calculated because the rates used to figure it out are available to the public.

EIBOR is a widely accepted benchmark interest rate that is used in various financial products, including loans, mortgages, and bonds in the UAE financial market.
It provides a transparent and reliable reference rate determined by the supply and demand of funds in the interbank market, which helps ensure fair pricing for financial products.
EIBOR provides an objective measure of the cost of borrowing, which helps borrowers to make informed decisions when taking out loans or other financial products.
The use of EIBOR helps to promote the development of the financial market in the UAE by providing a benchmark that facilitates the trading of financial products.
As a widely accepted benchmark, EIBOR plays an important role in shaping the UAE’s financial landscape, and its stability helps to instill confidence in the economy among investors and borrowers alike.

Disadvantages of EIBOR

One thing that is the disadvantage of EIBOR is that banks can change it. In 2012, it was found that several banks in the UAE had changed EIBOR rates, which led to fines and legal action against those banks.

Another problem with EIBOR is that it is based on loans that don’t have to be paid back in the interbank market. This means it does not show the true cost of borrowing for other types of loans, like secured loans.

EIBOR futures

Futures contracts that are pegged to the EIBOR rate are known as EIBOR futures. They allow investors to guess what will happen to EIBOR rates. The Dubai Gold and Commodities Exchange is where EIBOR futures are bought and sold (DGCX). They are settled in cash, so there is no need to send the underlying asset.

Options

Options contracts pegged to the EIBOR rate are referred to as EIBOR options. They give investors a way to protect themselves from changes in EIBOR rates.

On the DGCX, you can also trade EIBOR options. They are settled in cash, so there is no need to send the underlying asset.

Conclusion

In the UAE’s financial market, EIBOR is an important benchmark rate that affects the prices of loans, mortgages, and other financial products. It shows how well the economy of the UAE is doing, and small changes in EIBOR can have big effects on the country’s economy. EIBOR is calculated daily based on the information given by a panel of banks representing the UAE’s banking system. Policymakers, economists, and market participants keep a close eye on it.

Everybody involved in the UAE’s financial industry, from consumers to enterprises to government officials, must have a solid grasp of EIBOR. Stakeholders can make better borrowing, investment, and risk-management decisions if they closely monitor EIBOR and its fluctuations.

EIBOR and the UAE Economy: Understanding the Impact of this Key Financial Indicator