Consumers regained their love of credit cards last year as the value of transactions using the payment method rose by more than 50 per cent to Dh109.6 billion.
Low borrowing costs and rebounding consumer sentiment were likely factors behind the increase in available credit, said economists.
Point of sale transactions by value swelled by 48 per cent to Dh127bn during the year, according to data released by the Central Bank.
The data included debit card purchases, which rose by 28 per cent in value last year to Dh17.3bn.
But it was the extent of the rise in credit card usage compared to previous years that was most striking. The value of purchases using the same payment method in 2012 rose only 0.8 per cent from the previous year.
“In 2010-12, growth in debit card use – both in terms of the number of transactions and their value - was much higher than credit card use, but this trend was sharply reversed in 2013,” Khatija Haque, the head of Mena research at Emirates NBD, wrote in a research note analysing the data. “This suggests increased confidence on the part of consumers, increased availability, lower borrowing costs, or a combination of these factors.”
Consumer credit previously surged before the global financial crisis of 2008 to 2009 as people spent beyond their means to keep up with rising living costs. When the economy nosedived and job losses mounted, many people were left unable to pay their debts.
Consumers spent the next several years clearing their debt, while banks pulled back credit lines.
Now, however, that trend appears to be reversing again. Loans, advances and overdrafts to residents rose 11 per cent last year, according to previously released Central Bank data.
“We expect it [consumer lending] to remain strong for the rest of this year as the retail and consumer segment is a big area of growth for banks,” said Dima Jardaneh, senior economist at EFG Hermes, the Egyptian investment bank.
Improving profitability in the banking system encouraged more lenders last year to offer credit to consumers at more favourable rates. Signs that the economic recovery was gaining traction also encouraged more people to make purchases using plastic.
UAE GDP growth was at 5.2 per cent last year, up from 4.4 per cent a year earlier, according to the National Bureau of Statistics.
Overall, the interest rate environment has been benign in the aftermath of the financial crisis as the UAE mirrors the US by trying to keep the cost of borrowing down in an effort to stimulate the economy.
But even as the UAE economy picks up speed, borrowing costs may continue to remain low for some time.
“I think a hiking up in interest rates will be stretched out in the US until the second half of 2015 as the recovery is not really taking hold, so we expect low interest rates to continue,” said Ms Jardaneh.
Appearing before the Senate Banking Committee on Tuesday, the US Federal Reserve chairwoman Janet Yellen defended keeping interest rates low, but said they would be raised if the labour market continued to improve more quickly than anticipated. The unemployment rate in the US dropped to 6.1 per cent last month, down from 7.5 per cent a year ago.
Consumer lending in the UAE has emerged as a profitable avenue for banks as they adapt to new regulations that threaten to hamper revenues in other areas, including lending to government-linked companies and mortgages.
Last year, the Central Bank capped the amount a bank could lend to government and related entities at 100 per cent of its capital base, while also setting mortgage caps for first-time buyers of a home at 80 per cent of the property value for Emiratis and 75 per cent for foreigners.
tarnold@thenational.ae
Follow us on Twitter @Ind_Insights