11.27 AM Friday, 29 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 04:56 06:10 12:26 15:53 18:37 19:52
29 March 2024

Hire purchase still going strong

Malls remain busy despite an increasing unavailabilty of finance to people in lower income groups. (HAITHAM MOUSSAWI) 

Published
By Safura Rahimi

The difficult financial times of today may be forcing consumers to check their spending habits, and the UAE's banks to take measures safeguarding themselves against bad debt, but shopping remains high on Dubai's priority list.

And dealers and retailers are stepping into the space vacated by banks by continuing to offer hire purchase options to their customers, especially in the automobile and electronic goods sector.

Flashy cars are still in demand, laptops and smart phones are flying off the shelves and purchases on equated monthly instalments (EMI) continue to be popular. Although some retailers have stopped monthly instalment payment schemes in recent months – Plug Ins Electronics stopped theirs over a year ago – at others these plans are still readily available.

Electronics retailer Jacky's offers what it calls a 'smart loan' for big-ticket purchases such as LCD TVs and big home appliances through Abu Dhabi Commercial Bank (ADCB). ADCB requires customers to have a basic salary of at least Dh3,000 per month and a minimum purchase of Dh3,000 to be eligible for a maximum three-year loan. However Jacky's added that Emirates Bank stopped giving similar loans for customers after Gitex this year.

"There has been a slowdown [in EMI purchases] but overall the sales slowdown is not linked to this, because the loans don't contribute a substantial amount of our business," said Jimmy Patel, General Manager at Jacky's Electronics. "Most of it is through credit cards and as long as plastic money is there I don't see business slowing down." Patel added that sales of mobility gadgets, such as mobile phones, iPods and cameras, have not seen much impact, as loans don't play a key role there.

At the top end of the economy, the UAE government last month said it would inject Dh70 billion into the banking system to ease tight lending conditions. And UAE banks are working to stabilise a liquidity crunch by tapping emergency funds as they face the fallout of the global financial crisis.

The appetite for buying on long-term loans, though, has changed dramatically in the past few months, according to Gargash Motors. The UAE dealer for Alfa Romeo and Saab says people still want to buy cars but it's getting more difficult to get them on finance.

"Interest rates are going up, banks are asking for larger deposits on vehicles, and the amount of money they're allocating for car loans is being reduced. So they're becoming pickier over the customers they lend to," said Jonathan Greenslade, General Manager of Gargash Motors. He said more and more banks are now also asking for up to a 25 per cent down payment on new vehicles before providing a loan.

Bijou Daniel at the Chrysler, Jeep and Dodge Showroom in Dubai, also said banks had become shy of auto financing, and although customers were concerned about lower liquidity they had not cut back on their spending. "It's certainly affected purchase levels, but not massively," he said. "Affordability is still not a factor; people are considering the product and not its affordability – if they like a car and want it, they stretch their budgets.

"I have a customer who makes Dh7,000 a month and he's got monthly loan repayments of up to Dh3,500, and he's happy." However, he said fewer people were coming in to buy cars than two months ago. "The number of cash deals has been affected – people don't want to spend cash, they want to look to financing," he added. "Now you often need to have a salary of about Dh15,000 per month, and no other loans, to be financed fully. Otherwise banks ask for a down payment. They're becoming more and more careful who they lend to."

Daniel said the dealership had seen banks, such as Noor Islamic Bank, cutting back its auto loan division last month. HSBC now finances only its own Priority and Status customers with salaries over Dh10,000 per month and bank clients of at least 12 months.

"We take our responsibility for prudent lending very seriously for the sake of our customers and for the long-term sustainability of our business," said Venky S, Regional Head of Assets and Liabilities at HSBC Middle East.

"In line with current market conditions, HSBC has further tightened its lending criteria to ensure that customers who do receive loans can afford to repay them at a time of considerable uncertainty around the world."

Other banks to re-evaluate lending rules include the National Bank of Abu Dhabi and Emirates NBD, which has now reportedly blocked consumer credit to employees of companies at risk.

Zaid Kamhawi, Chief Business Officer at Emcredit, said whenever liquidity becomes scarce lenders become more risk-averse. "This kind of assessment becomes even more important in the case of a transient population, like in the UAE where people move in and out of the country more frequently," he said.

This is a huge shift from as recently as a few months ago, when banks were calling up customers to offer car and other loans. Adverts are now being placed in the daily press by concerned banks such as Emirates NBD, which asks: "You wouldn't choose shoes that are too big, so why choose a loan that is?"

The bank has gone step further, with the launch of consumer finance company Emirates Money, offering simpler loans to meet vehicle and other financial needs across the UAE.

But vendors are also now working to help their customers bypass the bank loan route altogether. Gargash Motors now sells cars through its own car hire company providing its own loans on certain vehicles.

The new move, which began three weeks ago, is a bid to help more customers purchase the cars they want with only three monthly installments paid up front.

The company says the new deal means customers don't have to incur the eight to nine per cent interest on bank loans. With time, Gargash Motors predicts, half of its business will be carried out through these new "long term rentals" – or hire purchase routes.

The new package is mainly aimed at expatriate buyers who prefer a fully inclusive package. Currently applied to all Saab 9-3s, and to be expanded in future to the Alfa Romeo range, it is available as a one- two- or three-year lease with a three-month down payment fully refundable at the end of the contract.


The dos and don'ts of borrowing

-Don't forget to make payments on time, says Zaid Kamhawi, Emcredit's Chief Business Officer. Regular default on payments will negatively affect your credit report, which indicates credit worthiness and determines future access to new loans. "It's even more important for customers to practice responsible borrowing during financially difficult times as this is when it becomes easier to fall into over-indebtedness to keep up certain living standards," he said. "In cases this can result in customers defaulting on some of their monthly payments."

-Maintain healthy debt burden ratios (the ratio of salary that goes towards repaying loans). This ratio generally ranges from 30 to 55 per cent, and is usually set by the central bank.

-Become more demanding of lenders to reward you for good payment behaviour.

-Realise that good credit behaviour is an asset that should be used as a form of collateral when applying for credit.

"Individuals with tardy payment habits will find it difficult to gain access to loans in future and may have to pay higher interest rates, while good payment behaviour will be rewarded with preferential terms and interest rates," says Kamhawi.

-Don't think of credit as negative – it's the engine that drives economic growth and helps people meet everyday needs but it should be managed responsibly.

-Become savvier in financial products – now is the time to educate yourself in what different products mean to you and to revisit spending habits.

-Be prudent – avoid borrowing just to support current spending habits, and start managing your credit information. Do this first by requiring banks to make it available to other banks through credit bureaus, and second by using it as an asset in your application for credit.

Case study: Big Spender

Gregg Lee, 33, moved to Dubai from Toronto over a year ago as a secondary school teacher.

He earns a monthly salary around Dh30,000, including housing. And despite the current financial climate he still spends money regardless of whether he has the cash or not.

"The key is I have job security. I pretty much work in an industry where I won't lose my job. If I didn't have that security I would definitely be concerned about my spending – since the financial crisis things have become very rough and we all have to worry more about what we spend on things."

On top of monthly car payments on a four-year loan, Lee says he made regular purchases on his credit card "regardless of whether I have a balance". He adds: "I could pay [my car loan] back in one year if I saved every penny. My credit cards will take two months to pay off."

Most expats in Dubai say they didn't hesitate to purchase a car or to take out a loan despite being 'saving conscious' because of big bills back home. "Dubai has a culture of spending and it is really hard to save here," adds Lee. "I am an impulse buyer and if I want something I usually get it. But since the fall of the Canadian dollar I am trying to save up to send a big amount home."

The heightened incentive among expats to save more is currently thanks to the dramatic fall of Western currencies such as the British pound. However, Lee says most people he worked with had extra jobs to bring in more disposable income. "I always find ways to get what I want. For example, I tutor students on the side to generate extra income. That allows me to occasionally enjoy a few luxuries, such as more vacations."