Debt consolidation applications to Abu Dhabi Islamic Bank (ADIB) have doubled since the summer.
The bank now receives between 4,000 and 5,000 new applications every month from prospective customers wishing to consolidate – typically one large personal loan and multiple credit cards with high revolving balances – into one loan.
ADIB attributes the bulk of the rise in applications to increasing awareness about its consolidation product for new customers, called Al Khair, in addition to the success of its financial education Smartmoney programme.
"Credit card debt which is revolving with 3 per cent interest per month will take you anywhere from 75 years to 90 years to pay the principal off," said Jamal Alvi, the chief credit officer at ADIB.
“Whereas our solution for expatriates [offers them the chance to] pay the principal off in four years. We basically tell them about the whole concept and say, ‘Look, you are right now stuck in a debt trap and if you move to us under this consolidation programme you will be able to get rid of this debt.’”
The National has seen a spike in requests for help from people with excessive debt since it started running a series of articles highlighting the problem in July. Previous cases featured include a woman who took out loans and credit cards worth Dh250,000 before suffering a stroke, which left her unable to work. Her husband, who owes the same amount, cannot afford to cover her repayments.
The latest article in the series, which featured a man who is using Dh6,500 of his Dh7,000 salary to cover his instalments, was published last weekend and led to a further flood of letters from people seeking help.
However many people in the industry, such as Mr Alvi, say the UAE does not have a problem with excessive debt.
“You can’t say this market is over indebted because if you look at debt as a percentage of GDP it is quite low here compared to other comparable markets,” said Mr Alvi.
However, some people in certain sections, such as the mid-income range, who earn between Dh15,000 and Dh30,000, have more of a tendency to take on too much debt, he says. “There we do see some guys getting overleveraged,” added Mr Alvi.
“There is a bit of a social pressure here in the UAE with spending on nice clothes, nice houses,” said Ambareen Musa, the founder and chief executive of financial comparison site Souqalmal.com.
“The problem is there is a lack of understanding of budgeting; ‘how do I budget?’ A lot of people don’t even understand what kind of lifestyle they can afford.”
Under Al Khair, UAE nationals can borrow up to Dh3 million and expatriates up to Dh1m. The borrowers reflect the demographics of the country, with Indians, Filipinos, Pakistanis, and Middle East Arabs representing the largest nationality groups.
To qualify for the consolidation loan, applicants must be in a permanent job and earn more than Dh5,000 a month. They also need to have a clean history with Al Etihad Credit Bureau, in other words, to not be in default with any of their lenders, and to have missed no more than two payments in the past 12 months.
ADIB approves between 75 and 85 per cent of the applications it receives. Just two to five per cent of rejections are due to bad credit history. The majority of those turned down either do not work for an employer on ADIB’s approved list, and there are around 8,000, or they are above the 50 per cent debt burden ratio set by the Central Bank.
“These are extremely overleveraged people who bought from multiple banks and now their debt service ratio is so high that no bank can literally help them,” said Mr Alvi.
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