Banks in the UAE have been borrowing less in the interbank market and at shorter tenors than before the Dubai crisis erupted as debt jitters weigh and the end of the year approaches, treasurers said.

Uncertainty about Dubai's ability to finance its debt pile worth tens of billions of dollars raised concerns about the shape of the UAE's banking system, with analysts fearing it might hamper recovery of the second largest Arab economy.

'Interbank lending has reduced as banks want to retain whatever little liquidity they have. Banks know it is tough to get loans and won't be able to raise money in international markets,' one Abu Dhabi bank treasury official said.

A fellow banker at a major Dubai-based lender said the market activity was 10-15 per cent down with mainly banks from other Gulf countries being more hesitant than locals.

'Banks are lending, markets have been pretty liquid in the last couple of months but we are coming to the year-end and people are more cautious,' said a treasury banker at another major Dubai lender, who asked not be identified.

'Borrowing for terms above one month, the market has become illiquid,' he said.

Dubai's shock announcement that it sought a repayment freeze on its debt-laden flagship conglomerate hit investor sentiment, sending the emirate's credit default swap prices to eight-month highs.

While the Dubai government tried to ring-fence profitable firms from the $26 billion Dubai World restructuring, its debt woes led to credit downgrades for all government-linked firms.

The UAE's central bank tried to calm the situation opening a an emergency liquidity window for banks, but local lenders have not rushed to use the facility, citing no liquidity squeeze.

Only a few UAE banks have disclosed exposure to Dubai World so far with analysts fearing heavy losses. Senior bankers have said that Abu Dhabi banks had built an exposure to Dubai-based companies with at least 30 percent of their loan books.

The UAE's interbank rates have been edging up gradually this week, touching a one-month high at the central bank's fixing on Wednesday, but declined again on Thursday.

Treasurers said rates individual banks use to lend each other have showed no exceptional moves, floating around 50 basis points below the official guidance for one month tenors.

'It is a natural gap. The markets have a lot of liquidity,' said a Dubai-based money market manager.

The one month interbank lending rate was fixed at 1.48125 percent on Thursday, down from 1.48750 per cent in the previous fixing. – Reuters