What Is the Emirates Interbank Offered Rate (EIBOR)?
The Emirates Interbank Offered Rate, known by its abbreviation EIBOR, is the benchmark interest rate, stated in UAE dirham, for lending between banks within the United Arab Emirates (UAE) market. The dirham is the unit of currency in the UAE.
The EIBOR is also the reference rate used by borrowers and lenders to conduct financial transactions in Dubai and the surrounding Emirate kingdoms for such loans as mortgages, personal loans, and car loans.
- 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 other banks for short-term loans.
- EIBOR is calculated daily by the Central Bank of the UAE and published for use as a general reference for market interest rates and is widely used to set other interest rates in the region.
- The methods of collecting the underlying rates and publishing the EIBOR were reformed in 2018 to increase transparency and accountability in the process.
Understanding the Emirates Interbank Offered Rate (EIBOR)
The EIBOR, similar in purpose to the London Interbank Offered Rate (LIBOR), is a benchmark interest rate published daily by the Central Bank of the UAE that reflects an average of rates offered by major UAE banks for loans of short-term funding to other banks. It is based on the average interest rates at which UAE banks offer to lend unsecured funds to other banks in the United Arab Emirates dirham (AED) wholesale money market.
EIBOR represents the regional banking industry's average market interest rate for short-term bank borrowing and liquidity management in the interbank marketplace. In other words, if a bank has a liquidity issue or otherwise 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 also the benchmark basis for other transaction prices, including mortgages, consumer loans, and other Islamic finance.
Before April 15, 2018, the United Emirates Central Bank calculated this rate directly. After that date, the Central Bank outsourced daily calculation to Thomson Reuters Ltd. The bank continues to publish the past historical data from October 2009, as well as the daily EIBOR fixings published going forward.
The EIBOR is set each business day, excluding Fridays and Saturdays, at 11:00 a.m. local UAE time. For each tenor or maturity, the bank eliminates the two highest and two lowest contributed rates and takes the average of the remaining rates. Tenors range from overnight to 12 months. Many Islamic banks use EIBOR rates as benchmarks for determining the rates for specific agreements called ijara. An ijara is similar to an installment leasing agreement.
Changing Interbank Rate Calculations Worldwide
In 2018, the Central Bank of the UAE changed the way it calculates and reports EIBOR, to require greater recordkeeping and oversight for contributing banks. The Central Bank made the change for EIBOR calculations to bring about more accurate and transparent pricing. This change is part of the global adjustments made to these key interest rates in the wake of the LIBOR fixing scandal in 2012.
According to an announcement by the Federal Reserve in November 2020, banks should stop writing contracts using LIBOR by the end of 2021. The Intercontinental Exchange, the authority responsible for LIBOR, will stop publishing one week and two month LIBOR after December 31, 2021. All contracts using LIBOR must be wrapped up by June 30, 2023.
In the UAE, the number of contributing banks dropped from ten to eight, and some banks in the region have announced interest in a new benchmark. More importantly, under the new system, each bank must now justify their submissions based on economic and financial factors relevant to the rates they have offered. The highest and lowest contributions are still discarded before averaging the result.