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24 February 2024

Credit card interest rate to be capped at 1.5%

By Staff

The Central Bank of UAE will cap credit card interest rates at 18 per cent per annum, or 1.5 per cent per month, the Sharjah-based Arabic newspaper Al Khaleej reported this morning, citing unnamed sources.

The source also told the daily that the central bank will bar banks from unilaterally hiking the fees after a credit card is issued to a client – something that numerous readers of Emirates 24|7 have complained in the past.

The cap on credit card fees will come as a welcome relief to the country’s residents, who currently have to shell out the highest interest rates in the Gulf region.

A study published by Al Khaleej in 2011 revealed the interest rates range between 2.25 and 2.99 per cent in the UAE, which is equivalent to about 27-35.88 per cent annually, while it ranges between 1.6 and 2 per cent in Saudi Arabia; 1.5 per cent in Qatar; 1.74 to 1.83 per cent in Bahrain; 1.5 per cent in Kuwait; and 1.5-1.67 per cent for local banks and 1.75 to 2 per cent for foreign banks in Egypt.

The source told the daily that the central bank had concluded the new rules and regulations, and that it is anticipated to announce the new controls in February.

He has been quoted as saying that these new measures will also help the banks control their spiraling bad debt and therefore boost their bottom line in terms of lower provisions for non-performing loans.

The official told the daily that credit card defaults were responsible for banks charging up to 6 per cent as a ‘risk premium,’ thus pushing up the overall annual interest burden on consumers.

Bankers, on the other hand, have called for an active Federal Credit Bureau which can provide banks with comprehensive data on an individual’s credit history, thus minimizing the default risk. This, they maintain, will reduce the risk premium by up to 2 per cent, lowering the burden on paying customers.

The UAE Central Bank had said earlier this month that it was working on new regulations for credit cards, setting interest rates and fees for the first time in the country following growing public complaints about random charges by banks.

A senior official had told Emarat Al Youm Arabic daily that the Central Bank was in touch with all banks in the UAE to obtain information about rates and fees imposed by them on credit cardholders, adding that this would help formulate the new rules.

He had said information obtained by the Central Bank from the country’s 51 banks was a “surprise”, in an apparent reference to the high rates and many types of fees imposed by banks on credit card clients.

“We are studying a new comprehensive system that will regulate the credit card market and it will be binding to all banks,” head of the treasury at the Central Bank, Saif Al Shamsi, told the Arabic daily in mid-January.

“All options are under consideration…they could include setting a ceiling on fees and interest rates on credit cards or fixing definite fees and rates,” he had then said.

There are more than 7.3 million credit cards in the UAE, and the country’s lenders charge the heftiest fees within the region.

According to a survey, customers, disgruntled by inadequate banking measures, have been complaining about the hike in bank charges for some time now.

Several respondents expressed dissatisfaction about banking services and were of the opinion that banks were profiting at the expense of customers with disproportionate fee hikes, especially in the wake of doubtful and bad debts.

Banks need to set aside more provisions to deal with such debts in the absence of a Central Bank directive regarding service fees, said customers. For instance, Qatar Central Bank set a ceiling for service fees by banks to individuals.

This resulted in healthy competition among banks wherein each lender raised the bar on quality of services offered. Whereas in the UAE, in the absence of a ceiling, banks raise service charges randomly, said customers.

Disgruntled respondents also alleged that banks offer generous limits to customers that should not even qualify for a credit card, and then safeguard themselves by insuring those cards and charging the insurance premium to the customer, thus adding to his or her repayment burden. While this does protect the banks in case of a default, such practice cannot be termed ethical, said a section of respondents.

Often UAE banks attribute the fee hike to cost of technology, and there are times when new charges are thrust upon clients, the survey found.

Al Khaleej reported one such incident, where a client, after having paid regular installments on his loan for a year, decided to close it by making one payment for the rest of the due amount. But he was surprised to find that the bank, meanwhile, had increased fee for early repayment. He dropped the idea of single payment and continued with monthly installments because the interest for remainder of the premium would be equal to the repayment fee.

Some UAE commercial banks charge additional insurance premiums, too, said respondents.

As reported by this website earlier, a sharp expansion in fees imposed by banks in the UAE on credit card holders has prompted the central bank to study the issue to check whether banks are overdoing such fees.

In case the fees are found too high, the central bank may intervene as it has done in personal lending when it enforced new rules in mid-2011 setting limits on the size of the loan provided by a bank to an individual client, the Dubai-based Arabic language daily 'Emarat Al Youm' said in a report in December.

“The central bank is now studying fees imposed by banks on credit cards to determine whether these fees are exaggerated as it has done in personal credit,” the paper said, citing “informed” banking sources.

It said the central bank’s move followed a sharp rise in fees on credit credits and complains by clients about the introduction of new fees, including “maintenance and account statement fees.”

Other fees imposed by both conventional and Shariah-compliant Islamic banks comprise annual fees on the card, grant fees, charges on exceeding the card limit, default fees, foreign exchange dealing fees, credit card replacement fees and fees on payments at a third party.