Financial literacy is antidote to bad debt

While borrowing from banks, one must keep in mind that it is easy to fall into debt, but difficult to get out of the hole.

Who do you blame when debts cannot be repaid? Consumers, who borrowed more than they should have, or lenders, who extended unwise loans? Both, of course.

Certainly some banks have taken advantage of consumers with campaigns to attract customers for personal loans on predatory terms. Of course, in a normal scenario, borrowing is an important tool that can help people to improve their lives - to buy a house or to start a business, for example. But debt can also be a stifling trap, as many people have discovered.

The Central Bank records show an increase of 3.8 per cent in personal lending levels in the UAE, which reached Dh261.7 billion during the first 11 months of last year. Recently, Sheikh Mansour bin Zayed, the Minister of Presidential Affairs, noted that "banks are taking advantage of the unawareness of some Emiratis who blindly sign [loan] contracts". Some lenders have also tried to manipulate contract dates and other details to benefit from the debt repayment programme for Emiratis, which is run by the Ministry of Presidential Affairs. The programme covers personal debts that were unpaid before December 2011.

As The National reported yesterday, the Central Bank is reviewing further cases of default by Emiratis that occurred after the October 2012 presidential decree granted UAE nationals immunity from jail for writing bad security cheques.

Banks have urged authorities to speed up the process of establishing a federal credit bureau, to help lenders determine risk, and a bankruptcy law that would enable borrowers to resolve their debts without going to jail.

Both institutions are very much needed, but at heart this is an issue of responsible personal finance. A recent study by students at the University of Dubai for the National Bonds savings organisation found that only about 30 per cent of Emiratis save money regularly. This is a problem all over the world, with excessive and irresponsible lending levels contributing to the 2008 financial crisis and its aftermath. It's crucial that borrowers understand their obligations, and that these lessons are taught.

Getting a loan might seem like a good solution to immediate financial needs or problems. But keep in mind that it is easy to fall into debt, but difficult to get out of the hole.