Credit law in the wings as personal debts deepen |
|
Network this!
The lack of information with banks about the credit exposure and credit worthiness of their customers is a major cause of over-debt in the country, a senior financial official told Emirates Business.
"The reason individuals are falling into a situation of over indebtedness is because banks at the moment don't have enough information about their clients. They don't know the total exposure of their customers," said Zaid Kamhawi, Chief Business Officer, Emcredit.
"How can you know how much to lend to a specific individual if you don't have information about his total borrowings or how much of his current salary is going into repaying existing debts so you can determine how much more to lend him?
"Credit card limits are high and people can get five to six credit cards because banks have no way at the moment of knowing whether an individual has other credit cards. So they just base their decisions on information that they've been provided by the applicant. This is a typical situation of information asymmetry, where the borrower has more information about himself than the lender," Kamhawi said.
He said with a credit bureau, banks can set the right limits to individuals according to their capabilities and their existing exposure. "That's how you can protect individuals from falling into financial mismanagement."
Consumer loans in the UAE have surged 46 per cent so far this year to Dh54.04 billion. Outstanding loans to individuals living in the UAE at the end of June, 2007 amounted to Dh36.80bn, central bank data show on Sunday. Consumer loans in the UAE increased almost 40 per cent in 2007, as the second-largest Arab economy struggles to contain inflation and resist calls for it to drop its dollar peg or revalue its currency.
Loans to individuals rose to Dh43.46bn on December 31 last year, compared with Dh31.26bn a year earlier. Consumer lending has almost doubled over the last four years, during which time oil prices have also more than tripled, helping to drive the UAE economy and borrowing.
The UAE witnessed a 20-year high inflation of 10.1 per cent in 2007, pushing prices of commodities and housing through the ceiling. Obtaining a loan has thus become a necessary move to make ends meet for a lot of people.
This debt scenario has caused many expatriates - who comprise an overwhelming majority of the UAE's population - to decide to migrate to other countries or go back home.
According to a study by Bayt.com and YouGovSiraj, dissatisfaction with the widening gap between salaries and perceived cost of living makes more and more employees say they are considering switching jobs, industries and countries.
In Dubai, living expenses were alleged to have risen by 37 per cent, representing a gap of 20 per cent.
The widening shortfall between salary increases and the cost of living has led many to consider dramatic steps. In Qatar, 50 per cent of respondents said increases in household expenses have led them to consider relocating to another country or returning home. Oman came in second, with 47 per cent, while Kuwait saw the lowest numbers of professionals looking to leave the country, at 32 per cent. In the UAE, 37 per cent had thought about moving abroad.
Although many expatriates have already made up their minds to leave, most of them have not been able to due to their mounting debts. There are no figures on the current defaults but figures from the central bank show that there were 5,710 loan defaults in 2006 from a total of 562,000 loans.
Government estimates show that early this year, about 10,000 people were in court or jail in the UAE because of problems with loans. Another study conducted at the Dubai Central Jail found 42 per cent of inmates were there for failing to repay loans.
"The price increases, especially in rents, have caused a lot of people to just go back home. So whatever facilities or debt they had from at the banks, they have just left them," Graham Honeybill, General Manager, RakBank, told Emirates Business.
David Martin, business advisor at RakBank, added: "We can say inflation has a big effect on those with low salaries in our customer base. And we feel it's the same case at other retail banks as well. There has been increasing bad debt in (the lower segment of) customers."
But Emcredit's Kamhawi said defaults are related to each person's repayment behaviour and is not based on their income quota.
"I disagree with the finding that individuals in lower salary brackets are of higher risk because that's not necessarily the case," he said. "There are individuals that fall in the high salary bracket and still show a behaviour of non-repayment. It has to do with your behaviour in repaying.
"An individual who has a salary of Dh40,000 can also be over indebted while an individual with a salary of 5,000 may show consistent repayment behaviour. However, individuals with low salaries are easier targets to fall into financial mismanagement," Kamhawi said.
Currently, UAE courts have to settle thousands of debt-related cases. There is also no system to track credit history and assess people's borrowing capacity.
A special committee reported that while banks were required to limit personal loans to Dh250,000, some were lending customers with low salaries more than 55 times their monthly wage. About 560,000 people borrowed nearly Dh700bn last year, government figures show. The UAE's Federal National Council has proposed stringent rules for personal loans to prevent more people falling deep into debt. At a meeting in May, officials urged the speedy creation of an independent credit bureau to regulate the multi-billion dirham lending industry.
The irony is that a credit bureau already exists. Two years ago, the Emirates Credit Information Company (Emcredit), the UAE's first credit bureau, opened its doors under the directives of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE, and Ruler of Dubai.
Emcredit said that currently they have only gathered 20 per cent of the emirate's banking and financial data. The firm plans to have an 80 per cent coverage across the UAE by the end of next year despite the pending ratification of the UAE Federal Credit Information Law, which is slated to make it mandatory for all financial firms in the country to submit data to a central credit bureau.
Analysts, however, believe the law would not be ratified in the near future due to a number of bureaucratic factors.
Speaking to Emirates Business, Chris Dommett, CEO of John Charcol Dubai, said: "The issue of having a credit bureau is being talked about for almost 10 years and I remember from my banking years, 10 years ago, the central bank was asking all the banks to contribute into a central credit database. But it really didn't take off."
Kamhawi, who worked on the technical committee of the draft law, on the other hand, is more positive.
"I think the government realises the importance of having such a Credit Information Law and, hopefully, it will be passed soon," he said.
Benefits of a credit bureau
UAE banks currently have no access to a comprehensive data bank that would help them decide what amount to lend and to whom. Because of this, banks treat everybody in same way and charge all applicants the same interest rate.
"Banks at the moment use adverse selection because they can't differentiate the good borrower from the bad borrower," Zaid Kamhawi, Emcredit's Chief Business Officer, said. "What credit bureaus allow banks to do is to set interest rates, or a risk premium pricing, according to the risk of the individual. Good borrowers should benefit with lower rates compared to bad borrowers and, at the moment, this is not happening in the UAE," he added.
Kamhawi said the current set-up creates inefficiencies and only a credit bureau can help patch these information gaps.
"As we increase our data coverage and as we have an access to a large data pool, it will allow banks to assess a larger portion of the population and improve a greater number of their decisions," he said.
By Karen Remo-Listama
© Emirates Business 24/7 2008
Community Comments (0) - 
Comment on this article 
Comment on this article
The opinions of the authors expressed herein do not necessarily state or reflect Zawya. Read our Comment Policy.
Loading ...
Zawya Comment Policy:
-
Zawya encourages you to add a comment to this discussion. You agree that when you add content to this discussion your comments will not:
1.1 Contain any material which is libelous or defamatory of any person, is obscene, offensive, hateful or inflammatory or causes damage to the reputation of any person or organisation.
1.2 Promote sexually explicit material, violence, discrimination based on race, sex, religion, nationality, disability, sexual orientation or age or any illegal activity.
1.3 Be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence.
1.4 Be threatening, abuse or invade another's privacy, or cause annoyance, inconvenience or needless anxiety.
1.5 Be used to impersonate any person, to misrepresent your identity or affiliation with any person, or be likely to deceive any person.
1.6 Give the impression that they represent Zawya.
1.7 Advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse. - The content posted on www.zawya.com is created by members of the public. The views expressed are theirs and unless specifically stated are not those of Zawya. Zawya reserves the right to review all comments prior to posting and edit or delete any contribution, but Zawya is not responsible for and can not be held liable for any content posted by members of the public on www.zawya.com.
- Zawya is not responsible for the availability or content of any third party sites that are accessible through www.zawya.com. Any links to third party websites from www.zawya.com do not amount to any endorsement of that site by Zawya and any use of that site by you is at your own risk.
- By submitting your comment, you hereby give Zawya the right, but not the obligation, to post, air, edit, exhibit, telecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comments worldwide, in perpetuity.
Post Your Tender Notices for FREE
(No Sign-in Required)
Zawya Tenders is a Tender Notices service entirely driven by contribution
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
| UAE Tenders | Due Date |
Community Buzz
Stories
Companies
Most viewed companies by Community in the last 24 hrs
| Company Name | Country | Industry |
| Consolidated Contractors Company | Overseas | Construction and Design |
| Saudi Binladin Group | Saudi Arabia | Construction and Design |
| Saudi Telecom | Saudi Arabia | Telecommunications Services |
| Saudi Electricity Company | Saudi Arabia | Electric Utilities |
| Sharjah Electricity and Water Authority | UAE | Electric Utilities |
| Emirates Aluminium Company | UAE | Metal Production |
| Emirates Telecommunications Corporation | UAE | Telecommunications Services |
| Hyundai Engineering and Construction Company - Saudi Arabia | Saudi Arabia | Construction and Design |
| Al Azizia Panda United Company | Saudi Arabia | General Retailers |
| Commercial International Bank (Egypt) | Egypt | Banking |
Projects
Most viewed projects by Community in the last 24 hrs
| Project Name | Country | Sector |
| Takreer - Ruwais Refinery Expansion | UAE | Oil and Gas |
| Al Futtaim Carillion - Marina Hotel (Yas Island) | UAE | Real Estate |
| Emirates Aluminium (EMAL) - Smelter Complex - Phase 1 | UAE | Industry |
| Abu Dhabi DOT - Abu Dhabi Metro | UAE | Infrastructure |
| ENEC - Nuclear Power Plant | UAE | Power and Water |
| SATORP - Jubail Refinery and Petrochemical Complex | Saudi Arabia | Oil and Gas |
| Dubai RTA - Dubai Metro | UAE | Infrastructure |
| Al Safwa - Jeddah Cement Plant | Saudi Arabia | Industry |
| Qatar Bahrain Causeway Foundation - Qatar Bahrain Causeway | Bahrain | Infrastructure |
| Qatar Bahrain Causeway Foundation - Qatar Bahrain Causeway | Qatar | Infrastructure |