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 2nd
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.
