Firms grapple with higher rates

ABU DHABI // Increased borrowing costs across the region are reshaping the landscape for companies and consumers. They are driving up profits for banks, hiking the cost of retail loans and putting an extra strain on industries already grappling with inflation in global commodities prices.

Interbank loans in the UAE, Saudi Arabia and Kuwait - the three GCC countries for which reliable data is available - have risen dramatically in recent weeks. The UAE's one-month Emirates Interbank Offered Rate (Eibor) increased roughly 30 per cent, from two per cent to 2.6 per cent, since the beginning of June. Saudi's rate rose from 2.1 per cent in May to 3.6 per cent yesterday, an increase of about 75 per cent. Kuwait's interbank rate rose from 1.31 per cent to 2.31 per cent during the same period. Interbank interest rates, or rates on loans made between financial institutions, form the basis for pricing most loans.

While the cost of borrowing remains in the low single digits, the recent rise, spurred by a shortage in the amount of money available for loans, is already shifting the dynamics of lending in the region. Businesses that borrow from banks to fund day-to-day operations are bearing the brunt of rising rates. For businesses exposed to rising global commodity prices, higher loan costs are an unwelcome strain.

"The overall cost of running the business is far more than what it was last year," said Abid Ali, owner of Jigsaw Exhibitions, an outdoor advertising firm in Dubai. "The surge in interest rates is an additional burden." So far, higher rates had not directly affected business decisions, he said, but they "would become a worry if the cost of running the business grew so much that even increased volumes did not compensate". He said smaller and medium-sized enterprises would likely be first to feel the pinch of the increased cost of borrowing - especially those that import commodities such as steel, aluminium and food, all of which have seen steep price rises in recent months.

"There will be a time soon when businesses might not be able to pass the added cost on to the clients," he said. These "wholesale" borrowers - mostly corporations - are adjusting to the new reality of more expensive loans, said Sanjay Uppal, the chief financial officer of Emirates NBD, the country's largest bank. "All our retail borrowers and most importantly wholesale borrowers, which are the largest part of the asset book of this country, are very well aware of what's happening and are very accepting of the new prices they have to pay," he said. "I don't think there is anybody sitting there saying 'I'm going to pay the same price I paid 12 months ago or eight months ago'."

Shafqat Malik, the chief financial officer of the property developer Aldar, said he was not yet alarmed about interest rates, as they are still affordable in absolute terms. He was, however, concerned by the apparent dry spell in liquidity - or the availability of money to lend - in the market. If banks turned off the lending tap because of the credit crunch and other constraints, it could have an adverse effect on his business and the vast array of economic activity in the region that depends on borrowed money.