Dubai World Interest Rate Offer Likely to Hurt Local Banks

* username: rupertbu

Dubai World’s offer to pay creditors interest of 1 percent on new loans as part of a plan to restructure $14.2 billion of debt, or a fifth of the market rate, will hurt local lenders more than foreign banks, analysts say.

“The cost of funds for local banks is higher because they pay a higher rate on deposits,” Germaine Benyamin, an analyst at Al-Futtaim HC Securities Co., said in a phone interview from Dubai today. The impact of the lower interest rates “would be lower on foreign banks than local banks.”

Dubai World, the state-owned holding company, is offering to pay creditors 1 percent interest on new loans as part of a restructuring plan, a banker familiar with the plan said April 15. Banks are reluctant to accept the new rate as it is lower than the market rate of about 5 percent and would force them to book impairment provisions, two bankers said that day.