The cumulative value of personal loans in the UAE grew 24 per cent in the first half of this year to Dh54.03 billion (US$14.7bn), new figures showed yesterday, extending a surge in lending that has led to tighter restrictions from the central bank. The monetary authority in 1993 capped personal loans at Dh250,000 and put a Dh2 million limit on small business loans.
Yet the rate at which these loans have grown has increased rapidly in recent years. Last year, lending to individuals grew by almost 40 per cent, to Dh43.46bn. In April, the Central Bank of the UAE changed the rules, doing away with the Dh250,000 cap and limiting loans to 25 times the borrower's monthly salary. This was viewed in many quarters as a measure that would only add to the number of loans on the banks' books.
Yesterday's figures from the central bank confirm that personal lending has not slowed since the regulations went into effect. Personal loans have boosted the bottom line for banks across the UAE as a raft of overseas labourers and white-collar workers have arrived, attracted by high salaries and a ballooning economy. According to Raj Madha, a banking analyst at the investment bank EFG-Hermes, the two factors that could make personal loans go sour for banks in the UAE - an increase in the unemployment rate and a jump in interest rates - have yet to materialise.
"This environment is rosy for the banks," Mr Madha said. "It's a very positive environment. We've had strong net immigration and not much concern over the labour market." If banks have been the beneficiaries of the rise in personal lending, consumers who signed up for loans without fully evaluating their terms or understanding the risk of default have come out on the losing end. According to a government estimate early this year, about 10,000 people are in court or jail in the UAE because of problems with loans. Another study conducted at the Dubai Central Jail found that 41.6 per cent of the inmates were there for defaulting on personal loans.
Nevertheless, according to the most recent central bank figures, there were 5,710 loan defaults in 2006 from a total of 562,000 loans. That is a default rate of just more than one per cent. The central bank's recent attempts to limit personal loans stem partly from concern that consumers are getting too deeply into debt. The bank is also concerned, however, about inflation, which last year topped 11 per cent in the UAE.
As personal loans rise, so does the amount of money in circulation, which can lead to higher prices for goods and services. The growth in loans has also led to calls for better credit reporting in the UAE. The country's one credit reporting agency, Emcredit, has so far been slow to gain wide acceptance and use among the banks. The UAE Government said in April that it was studying a law to start a federal credit bureau. At present, a person can take out a loan from one bank and then go to another bank for a loan without the second bank knowing about the first loan.
"This does highlight the need for a credit bureau that covers individuals as well as corporates," Mr Madha said. "But the trouble is that the banks have a mixed incentive to help in the creation of this credit bureau." While a credit bureau would make it easier for banks to make credit decisions, it also would make it easier for new competitors to enter the market, he said. With an established bureau, a newcomer can easily gauge how to price loans and which clients to target for business, the kind of closely guarded information that established local players have spent years gathering.
"If you are a large incumbent player, you might be more worried about new entrants than you are about making a mistake on the creditworthiness of a client," Mr Madha said. @Email:afitch@thenational.ae