Banks operating in the UAE have maintained their financing offers for individuals and businesses following the Central Bank’s decision to raise the base rate by 25 basis points.

This marks the first interest rate increase in more than three years and follows a similar move by the US Federal Reserve, reflecting the UAE dirham’s peg to the US dollar.

The impact of the rate increase was seen more quickly in deposit returns. Since last Saturday, deposit rates have risen by 25 basis points, with fixed returns reaching between 4.5 and 5.5 per cent, depending on the deposit term.

Financing rates, by contrast, have not increased at the same pace, as banks continue to offer competitive deals to attract new customers and maintain their market share.

A review of several banks serving a large proportion of the market’s customers shows that competition over customer packages remains strong.

These offers include reduced interest rates on personal loans until further notice, starting from a fixed rate of 2.5 per cent.

Banks are also offering grace periods of three to seven months before regular repayments begin. One major Abu Dhabi bank is offering UAE national customers a grace period of up to 12 months.

Why did loan rates not rise immediately?

Banking expert Ahmed Youssef said an increase in the base rate does not necessarily mean that the cost of all loans will rise immediately or uniformly.

He said bank financing is priced according to several factors, including funding costs, benchmark interest rates, the type and term of financing, risk levels, customers’ creditworthiness, each bank’s policies and the level of competition in the market.

“Deposits, meanwhile, become more important in a high-interest-rate environment, prompting banks to improve returns on some savings products and fixed-term deposits to attract new liquidity and retain existing deposits,” Youssef said.

He explained that customers who prefer to save can benefit from higher returns on their funds in such conditions, particularly if they choose fixed-term deposits with specified maturities.

However, returns vary depending on the bank, deposit amount, term and conditions of each product.

Impact of higher interest rates on mortgages

According to Youssef, the effect of higher interest rates on mortgage borrowers largely depends on the type of financing.

Fixed-rate mortgages are generally unaffected during the period for which the rate is locked in.

However, the cost of variable-rate mortgages may change when they are reviewed and repriced, based on the benchmark specified in the financing agreement.

Bank competition extends beyond interest rates

Banking professional Tamer Abu Bakr said financing offers remain available and that competition among banks is a key factor in determining the final lending rate offered to customers, particularly for personal, mortgage and car loans.

He explained that banking competition is not limited to interest rates, but also covers fees, repayment periods, loan-to-value ratios, salary transfer requirements, approval times and additional product benefits.

As a result, even with a single base rate, the final cost of financing can vary from one bank to another.

“The impact of the interest rate increase is expected to become clearer in the coming period, particularly as existing variable-rate loans are repriced and banks review their funding costs and the returns offered on deposits, especially if rates rise again before the end of this year,” Abu Bakr said.

He added that higher interest rates create more favourable conditions for savers, allowing them to earn greater returns on funds held with banks.

However, he said banks generally seek to strike a balance between maintaining competitive financing offers, attracting deposits and managing funding costs.