Bahrain interest rates on loans stable, despite rising US rates, BMA study finds

Interest rates on deposits, on the other hand, are rising, in line with rate increases in the US. The weighted average interest rate, applied by Bahrain's commercial banks on short-term deposits, have increased 218bp in the past seven fiscal quarters, decreasing the margin between interest rates on fixed-term (3-12 months) deposits and personal loans to 4.89%

The study, conducted by BMA's Economic Research Directorate, also took into account interest rates offered by the BMA on public debt instruments and money market instruments, including the Repurchase agreement (Repo), which have also followed an upward trend.

"As a central bank, the BMA monitors the movement of interest rates internationally and the impact of such movement on domestic rates," said Mr. Ahmed Jassim Bumtaia, Director, Economic Research, at the BMA.

The study on interest rates focused on rates applied by Bahrain banks between Q4 of 2003 until Q2 of 2005. It compared domestic rates with prevailing US interest rates, as the Bahraini dinar (BD) is linked to the US dollar.

Following are key findings of the study:

• Interest rates on personal loans averaged 7.75% at end June 2005, a decrease of 47bp from end March 2005. Business loans reached 5.38% at end June 2005 from 5.54% at end march 2005

• Interest rates on fixed term deposits of (3-12 months) tenor rose from 2.62% at end of March 2005 to 2.86% at end June 2005.

• The margin between fixed-term deposits and personal loans narrowed from 5.60% at end of march 2005 to 4.89% at end of June 2005 and the margin between fixed-term deposits and business loans narrowed from 2.92% to 2.52% during the same period

On prevailing US interest rates, the study period ranged from March 2004 to June 2005. The US Federal Reserve began raising short-term interest rates in June 2004.

Interest rates on other financial instruments were also aligned with fluctuations in US rates, the BMA study found.

Interest rates on BMA's 3-month Treasury Bills grew from 1.0% in March 2004 to 3.4% in June 2005, while the return on the short-term Sukuk Al-Salam (Islamic bonds) rose from 1.1% to 3.4%. Interest rates on Repos rose to 3.5%, from 1.3% as well.

The dissemination of information on interest rates is an integral part of key financial sector data that the BMA makes public on regular basis, said Mr. Bumtaia. In its effort to continuously enhance transparency, the BMA, in 2004, began monthly publication of lending rates charged and savings rates offered by individual commercial banks in Bahrain.