Borrowers need to exercise caution

Educating everyone about the dangers of easy credit makes good sense. But encouraging Emiratis to borrow too much, by making it too easy to default, would just not make sense.

When the government announced plans in January to create a fund to ease Emiratis' debt burdens, the unstated goal was to promote a culture of saving. It was one short-term solution to the problem of people being jailed for debt, but it was not a comprehensive plan for reform.

Two months later, the Dh10 billion programme continues to serve as a life raft for Emiratis who have been hit hardest by the economic downturn. But more needs to be done on the broader goal of encouraging smarter personal finance.

On Saturday, the Central Bank urged lenders to find ways to reduce the debt burden for Emiratis who were paying exorbitant loan-servicing fees. Of course, the root problem behind expensive payments is not just the interest, but the size of debt in the first place.

So how can the UAE change this pattern of excessive borrowing?

Bankruptcy laws would help. So too would smarter lending by banks. Most important, though, are more responsible borrowers.

After a few lean years following the fiscal crisis, banks are again opening the spigot. This may be a welcome thaw for businesses and responsible borrowers, but it's potentially devastating for others.

There is ample evidence that many can't control their spending habits. Two years ago, the Swiss-based bank Credit Suisse estimated that residents' debt burden in the UAE spiked 300 per cent during the previous decade, to nearly $30,000 per person.

The debt-clearance scheme launched in January was a good start at offering a different approach. It demanded that beneficiaries' salaries be cut by 25 per cent, in part to re-pay the bailout. It also made recipients promise not to borrow again until their debts are cleared.

But reducing the personal debt burden substantially will only come when borrowers find a balance between spending and saving. Rather than repeated forgiveness schemes, which could discourage more fiscal responsibility, borrowers need to take ownership of their finances. In some cases, banks may be engaged in predatory lending, but that requires borrowers to be all the more careful.