House of credit cards

The UAE's consumers and banks should be aware of overextending credit and large amounts of constrictive debt.

Plastic peril: Gulf shoppers, who have been largely shielded from the financial crisis, are being advised to watch their spending.

DUBAI // It seems like all anyone is talking about these days is money. People want to know how much they have, how much they need, and most of all how much they have lost. However, for many in this part of the world, some of these concerns seem a continent away, particularly given the region's high spending power. But with the global credit crunch gnawing away at more and more global economies every day, local credit experts are advising the public here to play it safe.

The UAE credit bureau is urging greater responsibility from banks and individual borrowers in an effort to steer clear of the financial crisis battering much of the developed world. Officials with Emcredit, the UAE's first private credit information services company, are warning of the potential risks behind the region's avid consumer culture. "As a culture, the US has strong consumerism habits and the UAE has the same habits, since a lot of people are expats and in their mid-careers," said Zaid Kamhawi, the chief business officer of Emcredit. "The UAE has a very luxurious lifestyle so people are inclined to spend more than they earn and exhibit an overdependence on credit cards."

According to forecasts by Lafferty Group, a UK-based research house, the Middle East and North Africa (Mena) region will see a 51 per cent jump in the number of credit cards in circulation by the end of this year compared to 2006 levels, when 6.23 million cards were in people's wallets. GCC countries have some of the highest credit card penetrations in the region following years of card issuers seeking to capitalise on the high spending power in the Gulf. .

UAE residents alone hold one third of all the credit cards in the Middle East and Pakistan. Of the nearly six million people living in the UAE today, 59 per cent hold credit cards, with multiple cardholders making up a large portion. Collectively, they own some 2.4 million credit cards, according to market research by MasterCard Middle East, with each cardholder carrying 1.8 cards on average, compared with 3.5 per holder in Europe and more than five per holder in the US.

"One of the reasons there are so many is the largest section of the population is working class, so they are eligible," explained Mr Kamhawi. "Also, banks are very competitive, pushing more and more credit cards in this region." However, according to Lafferty Group, private credit card consumption in the GCC remains low, at anywhere from 5 to 7 per cent. "One reason is simply the lack of credit card terminals in countries like Oman, Bahrain and Kuwait," said Asad Khan, a senior researcher at Lafferty Group. "Also, the trend with locals in the GCC is to use a credit card as more of a borrowing tool than a transactional tool, so many people literally use a credit card just for taking money out of the ATM."

According to Lafferty Group's analysis, Saudi Arabia is the most profitable market in the region, both in terms of overall profitability, at US$107 million (Dh393m), and profit per card, at $95. Morocco stands at the opposite end of the scale in terms of overall profits, at $4m, while Egypt ranks the lowest in profit per card, at $20. Officials say the region's enormous spending power serves to fuel this fire. According to Colliers International, Emirati households have an average spending power of $23,000 (Dh84,400) per household per year; western households in the UAE average $19,500 a year; other Arabs average $13,500; and Asians living in the UAE average $10,000.

Premal Patel, a senior director of marketing at American Express in Manama, Bahrain, said the expatriate population boom had resulted in a field day for card issuers wishing to reap the benefits of the region's prosperity. For now, however, the Gulf remains a predominantly cash-based society. "Here in the GCC, 90 per cent of transactions are cash and 10 per cent is on card," said Mr Patel. The internet is also fuelling credit card consumerism. A four-country study released last week by the Arab Advisors Group showed that the UAE has the highest e-commerce penetration.

According to the report, 25.1 per cent of UAE residents engage in web commerce, which almost always requires the use of a credit card, versus 14.3 per cent in Saudi Arabia, 10.7 per cent in Kuwait and 1.6 per cent in Lebanon. The key problem, experts believe, is the immaturity of the financial markets. In most of the GCC, credit card applicants can go from bank to bank applying for personal loans, with little or no cross-checks between the lenders. Industry insiders say that because the region's credit card usage has not yet reached maturity, it is imperative that governments and banks work together to instil responsible borrowing and spending.

"Until last year, banks did not have total view of exposure of individuals, so they tended to rely on information given by credit card owners - but they rarely disclosed truthful information," said Mr Kamhawi. "Banks were happy to give multiple credit cards because they could charge a high rate and they were flexible about giving credit cards, but this is changing." While most would agree that the region is in no way faced with a credit crisis like that in the US and the UK, experts warn it is in everyone's best interests to be cautious and learn from the mistakes of the West.

"The debt levels here are nowhere near the debt levels of the US," noted Mr Khan. "GCC authorities are waking up and trying to curb the amount of credit debt, but there is still room for development and better regulation." [e-mail]