With an ever-increasing number of borrowers defaulting on bank loans in the country, the Federal National Council (FNC) has called for a fund to help UAE nationals who are caught in the debt trap, along with special courts to look into banking-related cases.
The recommendations come after statistics revealed that 41 per cent of inmates at Dubai Prison wound up there because they were unable to repay their loans. It also emerged that 5,710 defaulting borrowers were referred to the courts last year, many of whom ended up in prison.
Meanwhile, banks show no sign of restraining their lending spree. The total amount of consumer loans given by banks in the UAE, both personal and commercial, rose from Dh 119.22bn in 2006 to Dh 153.80bn in 2007, an increase of 22.48 per cent. While personal consumer loans increased by 39 per cent, from Dh 31.25bn in 2006 to Dh43.46bn in 2007, commercial consumer loans rose from Dh87.97bn to Dh110.34bn, an increase of 25.4 per cent. According to a banking study, personal loans in the UAE form around 18.8 per cent of the country's gross domestic production and 90 per cent of UAE residents owe some amount of money to banks.
This means that most UAE nationals and expatriates in the country, which is regarded as one of the world's best in terms of individual earnings, cannot meet their needs from their original income, the FNC said. It also called on the UAE Central Bank to abolish the practice of banks taking blank cheques as security from borrowers.
Personal loans in the UAE are governed by the law No. 12 of 1993, which defines them as loans given to people for certain purposes. The loan amount should not exceed Dh250,000, according to the law, and the borrower's salary, gratuity or any organised income source can be used as a guarantee.
Hashim Salim Al Kiwani, former official at the State Audit Institution, pinned the responsibility for the problem of chronic defaulting on loans in the UAE on banks, for not committing to international standards and criteria known as Debt Service Capacity. He said banks should carefully study the client's financial situation and repayment capability before issuing any loans.
Blaming the situation on competition between the large number of banks operating in the country, Al Kiwani said that banks issued loans carelessly and indiscriminately because they were afraid that if they refused a customer he would go to the next bank. He pointed out that there are 50 banks in the UAE, including 20 national ones. Their combined branches numbered 500, which is a big figure compared to the country's population.
The second reason for the banks' willingness to give personal loans easily is the competition between the government and the banking sector. The federal and local governments provide financial facilities and even direct finance to business projects and individuals. This narrows the borrowing and investment channel at the banks, which then find themselves pushed to expand through personal loans.
Al Kiwani also pointed out other economic impacts of the phenomenon, including low individual savings as a result of servicing the loans leading to the decline of national investment, widespread bankruptcy and bouncing checks and a large number of bad debts. He also said that the current situation is bad for the reputation of the country's economy and the banking sector. The number of financial crimes was growing and the society was increasingly acquiring a consumerist tendency wherein you lived for today without considering the price you may have to pay tomorrow.
Studies show that UAE society is characterised by a high degree of consumerism, especially for entertainment and luxury, such as the purchase of fancy cars and expensive jewellery. The studies also show that it is the youth who borrow the most in order to finance a fashionable lifestyle, which other young people are quick to try and emulate.
Dr Fatima Al Shamsi, from the College of Business and Economics at the UAE University, wrote in a study titled "Loans and Family Budget" that loans are not a new phenomenon for UAE nationals. Its roots extend to the pre-oil age, but the motives have changed. While in the old days people were obliged to borrow for survival in a productive society that yielded returns, the current generation borrows for pride, consumption and imitation. Another study by economist Najib Abdullah Al Shamsi, reveals that the individual's motives for borrowing from banks are divided into two types. The first is necessity, such as for a marriage, building a house or other family requirements. The second is for luxury.
Al Shamsi's study sheds light on eight factors causing the personal loan problem. They are economic openness, development of advertising, the desire of a wide spectrum in society to make themselves distinctive and conspicuous in some form, a rise in the consumerist tendency among women, borrowing for compulsory savings, absence of consumer awareness in individuals and families, the high cost of living and the easy availability of loans at banks.
Yousef Al Nuaimi, a member at the FNC, alleged that banks in the UAE, both national or foreign, violate a lot of instructions issued by the UAE Central Bank, which is the body that determines the country's monetary and credit policy. The violations include exceeding the maximum permissible loan limit, burdening people with various loans such as through credit cards and car finance schemes, and exceeding the maximum repayment period of a loan. He added that he knows people who took loans for their marriage and are still repaying them though they have 15-year-old children.
Dr Mohammed Murad Abdulla, Director of Decision Support Centre at Dubai Police, said UAE banks should limit personal consumer loans and give more loans to industries. He also called on the UAE Central Bank to exercise greater control on the country's banks and banking sector.
In a recent survey on personal loans, out of 300 people questioned, 235 said that they had taken loans for personal or commercial purposes. Some 57 per cent said they had taken a loan at least once, while 43 per cent had taken loans for a second time.
New loan laws
A new set of rules to regulate personal loans is to be framed by the UAE Central Bank, according to its Governor, Sultan Nasser Al Suwaidi. According to the rules, which are still being discussed with banks in the UAE, the amount of a personal loan should not exceed 25 times the salary of the borrower and the value of the equated monthly installments should not be more than 60 per cent of the borrower's monthly income.
For car loans, the maximum permissible amount is proposed to be Dh150,000 which should not exceed 80 per cent of the car's value. Al Suwaidi also said that in the new system, housing loans will have a 25-year repayment period.
He also said that 75 per cent of bounced cheques are from the commercial sector and seven per cent are related to other banking cases. The remaining are from the sphere of import and trade and have nothing to do with personal loans.