The Central Bank of the UAE (CBUAE) has introduced a new deposit facility, Overnight Deposit Facility (ODF) which will allow conventional banks operating in the UAE to deposit their surplus liquidity with the central bank on an overnight basis. The service will be available for banks from 12th July 2020.
In a statement the UAE Central Bank stated;
“The introduction of the ODF is the first step towards the implementation of the new Dirham Monetary Framework announced earlier this year.”
Suggesting a pivot in the banking policy, the CBUAE added “The new deposit facility shall be the prime 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 Central Bank remarked that “With the introduction of ODF, the general stance of the CBUAE’s monetary policy will be signaled 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 market conditions.”
“The Base Rate, which will be anchored to the US Federal Reserve’s Interest on Excess Reserves, should also provide the effective interest rate floor for overnight money market rates.”
The CBUAE will also provide a modified version of ODF to cater to licensed financial institutions which are Shariah-compliant fully as well as partially.
“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,” CBUAE revealed.
CBUAE Governor, Abdulhamid Saeed 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.”
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