The UAE Central Bank reduced banking sector liquidity for the second consecutive month in August, it has been revealed, sparking hopes of an easing of pressure on lenders.

Altogether in July and August the UAE Central Bank withdrew total of Dh11.3 billion which is interpreted by analysts as easing pressure. However, the bank has moved Dh31.6bn into the banking system since the beginning of the year.

This withdrawal of excess liquidity led to increase in sales for certificates of deposit (CDs) which have reached their peak in the last couple of months.

“CDs are a liquidity management tool of the UAE central bank,” said banking analyst Shabbir Malik of EFG-Hermes.

“When there is excess liquidity in the system, the central bank sells CDs to the banks to manage liquidity and domestic interest rates. The amount of money withdrawn by the central banks is not significant in context of the banking system. Loan growth is very weak this year for UAE, so the surplus liquidity would typically end up in central bank CDs.”

Jaap Meijer, head of research at Arqaam Capital investment bank added: “Liquidity support from the UAE central banks is no longer required, in our view, because [the] Eibor-Libor spread has tightened,”said Jaap Meijer, head of research at Arqaam Capital investment bank.

“Last year, the GCC banking market suffered from liquidity drainage as governments withdrew deposits from the system as oil revenues dropped sharply. That caused spreads versus Libor to rise sharply, especially in Saudi. Liquidity conditions have since improved, as oil price has rebounded and government have diversified their funding requirements.”

 

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