Spending right can help people stay out of debt

The story of Hassan Al Nuwais provides a good example of debt management. As The National reported yesterday, after finding himself more than Dh3 million in debt, the 31-year-old father is now on a much better financial footing after seeking the assistance of the Debt Settlement Fund, which helps Emiratis burdened with severe financial problems.

Mr Al Nuwais was lucky to take part in the government’s initiative, but there are many other citizens and residents who are struggling to meet payments on loans and credit cards. There are several reasons why people fall into debt, but one contributory factor is almost certainly the appealing credit card offers that are made over the phone by agents. Despite the ban on cold calling by the Central Bank in 2011, it appears some financial institutions still use the practice or else utilise a rather loose definition of who is or isn’t a “cold” lead.

It is understandable when people borrow money to buy a house or pay for their children’s university education. These are good investments that grow in value. However, many debts are created to satisfy lifestyle choices, such as buying luxury cars or travelling to exotic locations on holiday and funded by easy access to unrealistic amounts of credit.

For a long time, UAE banks had no mechanism to assess the creditworthiness of applicants and have not been efficient in evaluating the level of indebtedness of borrowers. A new credit bureau will, hopefully, address this issue. With such a system in place, lenders will be able to better assess the credit worthiness of applicants, for personal loans or credit cards, and check if customers have debts spread across a number of different lenders. Having an official agency will also provide reliable and thorough credit reports that will add significant value to the way risk is assessed.

This, however, won’t guarantee prudential actions from banks, which means that more efforts should be done to make the public aware of the dire consequences of unpaid debts. The Emirates Foundation for Youth Development’s Esref Sah, or “Spend Right”, project is a good example. This financial literacy programme has reached more than 16,000 young people between 15 and 35 since it was launched last September. Better financial literacy will mean lower levels of risk, and a better awareness of products offered. It is personal responsibility, in the end, that will keep people out of debt.