Interest rates in the UAE

 All over the world interest rates would help determine the economy savings. Its changes affect investment either limiting profits, or expanding it for economic gain. In the UAE, the law stipulates that interest rates on loan be determined on loan agreement made between the parties involved, failure to which common interest rates in the market provided it does not exceed twelve percent would determine the rate (Baamir 178). Economic need and changes have made a shift of perception from the legislation view based on Sharia facilitating interest in commercial loans, and later in ordinary practices of money-making activities. The economy is well connected to the US dollar through the oil exports which causes serous implications especially in the event of changing oil prices connected to the monetary policy of the US. Real rates of interest have been affected by the existence of low nominal interest rates, following the dollar currency fixation and the increased capital mobility, together with the high inflation.

After the US macroeconomic policy, UAE nominal interest rates has kept close track to the US rates, resulting to real rates of interest becoming increasingly negative, even with the Emirates high inflation and after pegging to the US dollar combined with perfect capital mobility(MacDonald and Al Faris 100). For a long time the UAE struggle has been associated with the lack of independent monetary policy, problem arising from exponential capital mobility and fixed exchange rates. The Central Bank in UAE discontinued matching interest rate cuts by the US Federal Reserve which effectively led to rising of the relative cost of funds. However, this act of unexpected shift in foreign investment left its relative small economy exposed to market and economic risk. “The Central Bank has lowered its interest rate on repurchase of certificates of deposit from 5% in Q4 of 2007 to 2.25% in Q1 of 2008 in line with several cuts by the US Federal Reserve” then to 2% by Q3 of 2008, 1.5% by Q4 and a constant 1% down in 2010 (Hasan 18). (See table 1).

Table 1: Interest rates in UAE at 3 months inter-bank and repurchase rate between 2008 and 2^nd Quarter of 2010

Source: UAE Economic outlook 2010, globalinv.net, September 2010, Web, table 9.

a.      Note: The central bank continues to lessen interest rates in certificates of deposit repurchase from 2008 to a constant value from 2009.

            Commercial banking: this is the concept by which financial institutions are concerned with getting deposits and lending monetary services to businesses at an aggregate level whose aim is to earn profit. According to Jain T., Khanna, Grover, and Jain D., commercial banking entails primary functions that involve accepting of deposit and loans advancement (317). Concentrating on deposits in the bank, customers can choose from a variety of accounts at their convenience. Using fixed deposits accounts, cash is deposited for a fixed period while in Demand deposit accounts, the customer has the right to store and withdraw money the number of times he wishes. For recurring accounts, precise amount is stored, each month for a particular period with strict observation of expiry date for withdrawal purposes. Also, the saving accounts meant to promote small business and individual savings through imposed restrictions by the bank on the amount an individual can withdraw. Recently, commercial banks have introduced portable, home safe saving accounts that are kept at the depositor’s residence though the key is held in the bank.

            Not all the amount of money collected is kept in the bank, but partial quantity is issued as loans in the economy on approved security. Loans advancement by commercial banks includes over-drafts, loans and advances and cash credits. According to Beckwith, from a socialist point of view, commercial banks put idle money and capital  to work and increase the supply of money hence benefiting the society(61- 62). The bank main liability are the deposits made the customers while the bank hold reserves at the fed the same manner customers would  make deposits in the bank. Loans and bonds as bank’s assets are the ones that earn interest for the commercial banks. The required reserve ratio is the fraction of reserve at the fed (commercial banks bank) that is similar to people deposits in the commercial bank. The relation between deposits and reserves are indicated by the following formulas; Reserve = (reserve ratio)*deposit and deposits = (1/reserve ratio) * deposits (Taylor 239).

 

Taylor, John. Principles of Macroeconomics. 5th ed. Boston: Houghton Mifflin Company, 2007. Print.

MacDonald, Ronald, and Al Faris Abdulrazak. Currency Union and Exchange Rate Issues: Lessons for the Gulf States. Cheltenham: Edward Elger Publishing Limited, 2010. Print.