The Emirates interbank offered rate (Eibor) has fallen to 3.1 per cent in a sign that banks are lending to each other again. However, companies and consumers are yet to feel the benefits, with borrowing still difficult to find. "The rate is still pretty elevated and stressed, but it is coming down and that is a good sign," said Stephen Andrews, an analyst at UBS in Dubai. Nevertheless, analysts said it remained difficult to tell how much liquidity was changing hands at that rate. Early last month, Eibor was still at 4.2 per cent. Last August, Eibor for US dollar and euro transactions rose as high as 4.8 per cent following the departure of hot money from the country, when the financial crisis first started to bite around the world. In December, the Central Bank introduced dollar-dirham swap facilities, easing the pronounced pressures on interbank lending of foreign currencies. In addition, the Central Bank has injected Dh65 billion (US$17.69bn) into the banking system from two separate lending facilities. Banks in the country are finding themselves awash with cash, according to Malcolm D'Souza, the former president of the UAE's Financial Markets Association. "The interbank market is flushed with cash," he told Dow Jones. "Every bank is now a lender but demand has slowed down because there's been an asset price deflation. "Businesses are slowing down and are taking a cautious view of the market, they are taking a step back and viewing their future projects. They don't want to spend money in a market that might be in recession." Still, most local banks have seen their loan-to-deposit ratios rise above 100 per cent and are restricting their lending. Some economists say a lower Eibor reflects the liquidity trapped in the interbank market instead of being lent out into the real economy. Total deposits held at banks in the country fell 1.8 per cent last month from the month earlier, further widening a mismatch between deposits and loans, Central Bank data showed yesterday. Total deposits fell to Dh905.7bn from Dh922.5bn in December, the Central Bank said. Loans and advances climbed to Dh1.02 trillion, compared with Dh1.01 trillion in December, it said. Funding loan growth, however, remains an issue for banks across the UAE and the Gulf. "The elevated levels of Eibor indicate that competition for what funds are available remains high," said Mr Andrews. The Central Bank Governor, Sultan al Suwaidi, said last week that the credit shortage had eased as banks were no longer borrowing funds from the emergency facility. "[The emergency facility] has not been needed at this point in time because liquidity is better," Mr al Suwaidi said, adding that the banks had reduced their borrowings to "zero". Economists say that banks have stopped using the emergency facility because it fails to address their needs, and some are calling for the Government to inject more deposits into banks to restart their lending. "We need more deposits injected and more clarity on repo activities, only then can liquidity be untrapped from the interbank market into the real economy," said Marios Maratheftis, the regional head of research at Standard Chartered Bank. If banks completely trusted each other, Eibor would get much closer to the repurchase [repo] rate set by the Central Bank. The repo rate, currently at 1.5 per cent, is the interest the Central Bank charges banks for cash against their collateral, often in terms of certificates of deposit (CDs). Typically, Eibor and the repo rate should be fairly close. The fact that they were still apart suggested that banks still applied a risk premium when lending to and borrowing from each other, analysts said. Economists also would like to see the Central Bank revamp its repo system by holding more regular auctions and clarifying the rules on what it accepts as collateral. "Repurchase activities should become business as usual. Instead, banks are asking themselves whether it is a regular mechanism and what can be used as collateral," said Mr Maratheftis. * with agencies uharnischfeger@thenational.ae