UAE banks pushing loans to boost earnings

Gulfnews, Nov 4 – UAE banks are aggressively marketing personal loans to boost earnings in a booming economy. Growing competition is also making it easier to raise personal loans as banks are increasingly offering easier terms and higher credit limits.

Atif A Bajwa, head of retail banking at Dubais Mashreqbank admitted that banks are becoming increasingly aggressive in offering personal loans. "But you have to be careful that particular segments dont get loaded and there is no over-leveraging, particularly of the lower income segments. I think there should be a reasonable amount of self-restraint among banks," he said. Figures on loan delinquency and defaults are difficult to obtain, but bankers say they vary from a low of one per cent on auto loans where vehicles are mortgaged to the bank, to about four per cent for credit cards and personal loans without salary transfers. Murray Sims, head of personal banking at RAK Bank, said the increasing number of personal loans is due in part to Dubais booming economy.

"What you are seeing is rapid growth in the UAE and a lot of people coming into the country. A number of those individuals will require financial assistance of one sort or another and all banks would look to take advantage of that situation," Sims said. Some of those personal business loans were also used to invest in the UAEs equity market boom of 2005, Sims added.

UAE market regulations lead to an under-valuing of IPOs, which allowed investors to reap windfall profits shortly after the shares were listed. The chance to make a quick profit encouraged borrowing for IPO subscriptions. One reason, however, that the UAE runs the risk of higher defaults is the absence of a credit bureau which allows banks to access credit information. Many developed countries have a credit bureau which compiles and distributes credit and personal information to lenders. The information helps prevent individuals borrowing indiscriminately from multiple banks.

But banks say they closely follow a blacklist provided by the UAE Central Bank that includes credit card defaulters and those whose cheques habitually bounce. "At the moment we are not seeing anything that is any major cause for concern but I would love to see a robust credit bureau operating and in the UAE. I think it would be a huge benefit to the market in the long-term," said David Proctor, chief executive at Standard Chartered.

Competition for the personal loan pie is increasingly driving banks to offer loans without demanding salary transfers, like in most developed markets. Bankers say the number of expatriates fleeing with large loans to their home countries is few. Most banks now work through credit collection agencies to deal with such cases in countries ranging from Lebanon, Syria, India and Pakistan.