Experts for “Al-Ittihad”: Raising the interest rate increases banks’ profits

Experts for “Al-Ittihad”: Raising the interest rate increases banks’ profits
Experts for “Al-Ittihad”: Raising the interest rate increases banks’ profits

Yousef Al Bustanji (Abu Dhabi)

Economists emphasized that raising the basic interest rate (EIBOR) would increase the profits of operating banks, in addition to its role in curbing inflation and limiting the rise in prices of goods and services in local markets.
Experts explained that the high interest rate motivates customers to increase their deposits with banks operating in the country, and reduces the money supply, which pushes the prices of goods and services down.
Experts indicated that the rise in the base interest rate accumulates additional financial obligations on bank borrowers, especially long-term loans such as real estate loans with a term of up to 25 years, which leads to an increase in the value of monthly installments or an increase in the total value of the loan.
The Central Bank of the United Arab Emirates had raised the “base rate” on the overnight deposit facility by 75 basis points, from 2.4% to 3.15%, as of Thursday, September 22, 2022.
The UAE Central’s decision came after the US Federal Reserve announced an increase in the interest rate on reserve balances by 75 basis points at its meeting held on September 21, 2022.
Mohamed Abdel Bari, Chief Financial Officer of the Abu Dhabi Islamic Bank Group, said that the US Federal Reserve’s decision to raise the main interest rate by 75 basis points would lead to a significant increase in bank deposits, which could reduce the money supply and drive prices down. and, consequently, inflation levels.
He added: “With regard to Abu Dhabi Islamic Bank, we have seen an increase in deposits by 10% in the first half of the year compared to last year and 5% compared to the beginning of the year. Most of this increase consists of current accounts, which today constitute 75% of the bank’s deposits, and they are deposits that do not bear any cost to the bank.
As for financing, we did not notice any decline in financing ratios. Our financing increased by 10% compared to last year, and individual financing increased by 5% from the beginning of the year, including personal financing by 7% and real estate financing by 3%, and this indicates a high demand for financing. Even with the increase in Murabaha prices, this is due to the economic recovery, especially in the United Arab Emirates, from the effects of the Covid-19 epidemic.”

Bank results
Muhammad Ali Yassin, an economist, said that the acceleration of interest rate hikes during the past months will have a positive impact on the profits of banks in the country, as banks benefit from raising the immediate interest rate on loans and facilities, while usually delaying some time in raising the interest rate on deposits, indicating Raising the interest rate and increasing the return on the banks’ total credit portfolio will appear in the banks’ results more clearly by the end of this year.
He said that raising the interest rate leads to an increase in the banks’ revenues, without incurring an additional cost of marketing, pointing out that the rise in the interest rate and revenues is offset by a decrease in the volume of provisions as well, and therefore it is expected that the banks will achieve good growth in their profits.
But he pointed out that the effects of interest rates will be reflected in the results of banks, according to the size of each bank, indicating that the effect will differ from one bank to another according to the value of its credit portfolio.
For his part, Tawfiq Qadada, Director of Real Estate Finance Relationships in the local market, said that there is a direct relationship between the EIBOR rate, which is the “interest rate on transactions between banks in UAE dirhams in the local market” and the cost of financing and lending in general, especially long-term financing, especially financing. Real estate, since real estate loans are characterized by a long-term borrowing period of up to 25 years.
He added that a distinction must be made between two types of loans, according to the system of calculating interest rates on them, where the interest is “fixed” and “variable.”
Qadada explained that there are direct effects on the change in the EIBOR rate and are reflected in the value of the monthly installments deducted from the salaries of borrowers whose loans are classified among the existing loans based on a variable interest rate. As for loans based on a fixed interest rate, they should not be subjected to a change in their value. as a principle. He said: Since the end of the first quarter of this year, the EIBOR price has started to rise rapidly, due to the increase in the interest rate on the US dollar, and as a result of the linkage between the dirham and the dollar.
Qadada pointed out that the increase in the basic interest rate (EIBOR) several times during the past six months, led to an increase in the value of the deductions, that is, the monthly installment, for loans borrowed on the basis of a variable rather than a fixed interest rate. He explained that the banks operating in the country are, in principle, conducting a review of interest rates and the value of monthly deductions from the borrowers’ salaries, according to the deadlines on which the price is based. The interest rate on which the loans are based is for a period of 3 months, so the review process for the value of the monthly installment takes place every three months, and the same is the case if it is for any other term, according to the terms of the contract specifying the interest rate.
Qadada called on borrowers to pay attention to this change during the repayment period, indicating that some banks do not increase the monthly deduction or the value of the monthly installment owed by the borrower. The bank informs the borrower of the increase in time, the borrower will be surprised by a significant increase in the remaining loan value, at the end of the original term specified in the contract.
He said: Therefore, the borrower must inquire from the bank periodically about the value of the loan owed to him and the total remaining loan value, and to know any change in the value, and to check the terms of the contract because the changing interest must be reflected on the value of the loan, whether the monthly installment on a regular basis or By carrying it over to the end of the loan term, bearing in mind that in the event of a decrease in EIBOR, this should lead to a decrease in the total loan value and the value of the monthly deduction from the borrowers’ salaries.
Qadada explained that in light of the changes and economic repercussions that global markets are witnessing, it is preferable to go to the fixed interest rate even if the variable interest rate is lower than the fixed interest rate, because this keeps the borrower away from the risks and sudden interest rate increases.

The article is in Arabic

Tags: Experts AlIttihad Raising interest rate increases banks profits

PREV EUR/USD Forecast Today: Ready for a New Breakout
NEXT The struggle of the “two governments” in Tripoli – Al-Watan newspaper