Everyday a bank representative or two calls me up. “Madam, we’d like to offer you a free credit card with a limit of…” “…You can get an easy loan of 50,000 Dirhams…” all you have to do is sign the paper I’m faxing you, fax it back to me and the money will be in your account in a few working days.”
Refuse the offer and you’re bombarded with questions as to why you’re not interested in such a fantastic ‘recommendation’ to get some ‘free’ cash. What the aggressive promoters of those offers don’t tell you is how much trouble you’ll get into, if you fail to repay the loan. Suddenly, however ‘free’ can easily turn into ‘jail’ and ‘lawsuit’. With the readiness banks have in granting loans to residents these two words have become very common among regional borrowers and the debt issue a local phenomena.
Banks’ eagerness to grant loans and accept postdated cheques as deposits isn’t very surprising. These institutions think they have you financially covered, so when it’s payback time you should be able to produce the required amount. If you don’t, backed up by the law, they can throw you in jail. This year alone, 19% of inmates at Dubai Central Jail have been imprisoned because of bounced cheques, while 60% of them had no previous criminal records and have been jailed for the first time.
In the UAE, the total amount of credit has more than doubled to US$136.8bn in two years.
Locking up people behind bars continues to be the way in which these cases are dealt with in the UAE. The number of financial offenses such as cheque complaints, reported by Dubai Police, has soared over the past few years rising from 11,883 in 2002 to 16,715 in 2006. And with banks’ relentless efforts to shove another credit card in your wallet, bad debt has also increased, not only in the UAE but globally.
Last week, HSBC was preparing itself for not-very-great half-year results. Little surprise, as its sub-prime lending crisis in the US has spread to other parts of its loan operations. In addition to reporting an increase in bad debt in its unsecured lending book, banking analysts predicted provisions against its US personal financial services business of US$3.3bn for the first half of 2007. This indicates a 17% increase in provisions for the portfolio. The UK’s top five banks will also report enormous increases in bad debt in the near future.
Analysts anticipate banks to set aside US$13.3bn to pay for customers unable to meet payments.
In addition, official statistics from the Ministry of Justice in the UK are very likely to show a high increase in the number of repossessed houses as submissions to recall properties rise from 78,000 in 2004 to 132,000 in 2006. Bankruptcy is also expected to hit a record high as quarterly figures are released. During the first three months of this year the shocking figure of 300 people per day were declared bankrupt or entered insolvency procedures.
And Gulf countries are no exception. In Bahrain alone, total outstanding loans granted to residents by retail banks reached an approximate figure of US$9.16bn by the end of June this year.
In the UAE, the amount of total credit has more than doubled from US$53.6bn in 2004 to US$136.8bn in 2006, according to the UAE Central Bank.
Each UAE resident owed banks an average of US$6,490 (AED23, 834) at the end of 2005, a jump of 64% compared to 2004, while personal and car loans in the UAE have shot up in the past two years. While it was pointed, back in 2005, that the country lacks a credit bureau to track consumers spending habits this is no longer the case, however only a disappointing nine banks out of 53 have joined new bureau Emcredit. Whether this scenario will decrease personal debt in a country with such an established and aggressive consumer base – that is only getting more aggressive – is yet to be seen.
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