Deposit yields surge as UAE banks respond to central rate hike, but personal loans stay low to win customers
The Central Bank of the UAE raised its key interest rate by 25 basis points to 3.9% on September 17, 2023, triggering immediate adjustments in deposit returns across major institutions. While savers are seeing improved yields, banks have held off on fully passing on the increase to borrowers — keeping personal loan rates as low as 2.5% flat in selective promotions.
Savers gain higher returns, fast
Within days of the Central Bank’s decision, banks rolled out higher fixed returns on savings and time deposits, with rates now ranging between 4.5% and 5.5% depending on product terms and deposit length. The move aligns with global monetary trends, as the UAE’s dirham peg to the US dollar requires alignment with Federal Reserve policy aimed at curbing inflation. Experts say deposits are becoming a key battleground for liquidity. Banks are prioritizing higher payouts on fixed-term products not just to attract new funds, but to retain existing balances amid rising competition.
Personal loans remain discounted — even below inflation
Despite the rate hike, personal loan offerings have not followed suit. Some lenders continue to advertise starting rates of 2.5% flat, a figure that appears low because it calculates interest on the original loan balance rather than the reducing balance. In reality, this may translate to a reducing-rate equivalent closer to 7% — but the marketing appeal remains strong. For eligible customers — particularly UAE nationals, government employees, and those transferring salaries — promotions also include grace periods of up to 12 months before the first repayment is due.
Competition extends far beyond interest rates
Banks aren’t just competing on price. They’re differentiating through:
• Fees: Some waive processing fees for digital applications; early settlement charges are capped by regulation at 1% of the outstanding balance or AED 1,000, whichever is lower.
• Salary transfer terms: Loans with mandatory salary transfers offer lower rates — often 1–2% cheaper than non-transfer options.
• Repayment flexibility: Institutions compete on loan tenures, approval speed, and bundled perks like cashback or insurance coverage.
• Islamic financing: Sharia-compliant alternatives remain popular, using profit-sharing models instead of interest.
Mortgage holders face delayed impact
Homeowners with variable-rate mortgages will see payments rise when their loans reset, typically tied to the EIBOR benchmark, which moves in line with the Central Bank’s base rate. The next repricing date — whether monthly, quarterly, or semi-annually — determines when the change hits the account. Banks are legally required to notify customers in writing before any rate increase, including details of the new payment amount, but borrowers should proactively check their contracts for reset dates.
Fixed-rate mortgages, however, remain unaffected until the agreed term ends.
Looking ahead: More hikes possible
If the US Federal Reserve raises rates again before year-end, the Central Bank of the UAE is likely to follow. That could mean further pressure on variable-rate borrowers and continued pressure on banks to raise deposit yields. Meanwhile, lenders are expected to keep personal loan promotions aggressive to capture market share — especially in a growing economy where consumer credit demand remains strong.
For residents, the message is clear: savers benefit now. Borrowers should shop carefully — the cheapest loan isn’t always the one with the lowest headline rate, but the one with the best combination of hidden fees, repayment flexibility, and long-term cost.
The balance banks are striking — between attracting deposits, managing funding costs, and holding down borrowing prices — will shape financial life across the UAE for months to come.
