UAE’s Central Bank launches new deposit facility for banks

The UAE Central Bank (CBUAE) will launch a new deposit facility for UAE-based conventional banks.

The Overnight Deposit Facility (ODF) will come into effect on July 12, 2020, and will enable local banks to deposit their surplus liquidity at CBUAE on an overnight basis.

The facility is a first step towards implementing the new Dirham Monetary Framework announced earlier this year.

The ODF shall be the key facility for managing surplus liquidity in the UAE banking sector prior to the launch of the Monetary Bills Programme, and shall replace issuance of one-week Certificate of Deposits.

The general stance of the CBUAE’s monetary policy shall be put across through the interest rate of the ODF, which becomes the main policy rate of the CBUAE and will be referred to as the Base Rate.

Accordingly, the CBUAE expects that overnight money market rates should hover around the Base Rate under normal markets conditions.

The Base Rate, which will be anchored to the US Federal Reserve’s Interest on Excess Reserves (IOER), should also provide the effective interest rate floor for overnight money market rates.

The CBUAE will also be providing a different version of the facility for licenced financial institutions that conduct activities – holistically or partly – in accordance with Shariah rules. Until this facility becomes operational, the CBUAE will continue to offer to these institutions the one-week commodity Murabaha-based Islamic Certificate of Deposits, which will be breakable on daily basis.

Abdulhamid Saeed, governor of the Central Bank of the UAE, said: “The introduction of this new facility is a reflection of the CBUAE’s continuous efforts to achieve the objectives of its monetary policy and to foster money market developments in the UAE. This new facility will support banks operating in the UAE in proactively managing their day-to-day liquidity and help in aligning overnight money market rates with the Base Rate in normal market conditions.”

In the aftermath of the Covid-19 pandemic, a total of 26 banks availed the Targeted Economic Support Scheme (TESS) liquidity facility introduced by the CBUAE in March earlier this year.

Read: UAE Central Bank’s TESS liquidity scheme availed by 26 banks

The central bank has projected that economic activity in the country will start to recover in the second half of the year.

Also read: UAE Central Bank projects economic recovery in second half of 2020