Emirates Interbank Offered Rate (EIBOR)

What Is the Emirates Interbank Offered Rate (EIBOR)?

The Emirates Interbank Offered Rate, known by its condensing EIBOR, is the benchmark interest rate, stated in UAE dirham, for lending between banks inside the United Arab Emirates (UAE) market. The dirham is the unit of currency in the UAE.

The EIBOR is likewise the reference rate involved by borrowers and lenders to conduct financial transactions in Dubai and the encompassing Emirate realms for such loans as mortgages, personal loans, and vehicle loans.

Grasping the Emirates Interbank Offered Rate (EIBOR)

The EIBOR, comparable in purpose to the London Interbank Offered Rate (LIBOR), is a benchmark interest rate distributed daily by the Central Bank of the UAE that mirrors an average of rates offered by major UAE banks for loans of short-term funding to different banks. It depends on the average interest rates at which UAE banks offer to loan unsecured funds to different banks in the United Arab Emirates dirham (AED) wholesale money market.

EIBOR addresses the regional banking industry's average market interest rate for short-term bank borrowing and liquidity management in the interbank marketplace. At the end of the day, in the event that a bank has a liquidity issue or in any case needs money, they borrow from another bank and the interest rate on the loan is then incorporated into the EIBOR when the lender reports their offered rates the next day. This rate is then likewise the benchmark basis at other transaction costs, including mortgages, consumer loans, and other Islamic finance.

Before April 15, 2018, the United Emirates Central Bank calculated this rate straightforwardly. After that date, the Central Bank re-appropriated daily calculation to Thomson Reuters Ltd. The bank keeps on distributing the past historical data from October 2009, as well as the daily EIBOR fixings distributed going ahead.

The EIBOR is set every business day, excluding Fridays and Saturdays, at 11:00 a.m. neighborhood UAE time. For each tenor or maturity, the bank dispenses with the two highest and two most reduced contributed rates and takes the average of the leftover rates. Tenors territory from overnight to 12 months. Numerous Islamic banks use EIBOR rates as benchmarks for determining the rates for specific agreements called ijara. A ijara is like an installment leasing agreement.

Changing Interbank Rate Calculations Worldwide

In 2018, the Central Bank of the UAE changed the manner in which it ascertains and reports EIBOR, to require greater recordkeeping and oversight for contributing banks. The Central Bank rolled out the improvement for EIBOR calculations to achieve more accurate and transparent pricing. This change is part of the global changes made to these key interest rates in the wake of the LIBOR fixing scandal in 2012.

As per a declaration by the Federal Reserve in November 2020, banks ought to stop composing contracts utilizing LIBOR toward the finish of 2021. The Intercontinental Exchange, the authority responsible for LIBOR, will stop distributing multi week and multi month LIBOR after December 31, 2021. All contracts utilizing LIBOR must be wrapped up by June 30, 2023.

In the UAE, the number of contributing banks dropped from ten to eight, and a few banks in the region have announced interest in a new benchmark. All the more critically, under the new system, each bank must now legitimize their entries in light of economic and financial factors applicable to the rates they have offered. The highest and least contributions are as yet disposed of before averaging the outcome.

Features

• EIBOR is calculated daily by the Central Bank of the UAE and distributed for use as a general reference for market interest rates and is widely used to set other interest rates in the region.
• The Emirates Interbank Offered Rate (EIBOR) is a synthetic benchmark interest rate derived from the interest rates that major banks in the UAE offer to different banks for short-term loans.
• The methods of gathering the underlying rates and distributing the EIBOR were changed in 2018 to increase transparency and accountability simultaneously.