Systemic roots of banking disputes

It would be a mistake to vilify banks over the recent changes to loan rates. There are systemic explanations and banks have a valid point that they too are being squeezed.

Of course, it is patently unfair. More and more borrowers are alleging that banks have unilaterally changed the terms of their loans, increasing interest rates after consumers believe they have already locked in certain terms. One customer has told The National that he is being charged an additional Dh5,000 a month because of changes to his variable-rate loan. Not surprisingly, borrowers are crying foul over breach of contract.
More than any individual injustice done to them, however, the issue raises fundamental questions about the integrity of the banking system. If true, unilateral changes to the terms of loans undermine the fundamental purpose of contracts: to provide stability so people can do business with a degree of surety. If banks can radically change the terms of the loan, borrowers expose themselves to huge, unforeseeable risks. This can become a serious disincentive to conducting affairs inside the country.
Still it would be a mistake to vilify banks. There are systemic explanations for the policy changes and banks have a valid point that they too are being squeezed. When the Central Bank adjusted the way the Emirates interbank offered rate (Eibor) was calculated last year, it changed the terms of lending - the same terms that are at the heart of the contracts dispute. The banks are also correct that the costs of funding have gone up in recent months. While that doesn't justify the interest rate hikes for borrowers who believed they were locked into the terms of their loan, it does clarify some of the problems facing the banking sector.
Certainly some of the pain is explained by the global crisis that was so acutely felt in the regional property and financial sectors. Banks are suffering from a growing number of defaults, adding pressure to increase profits in other areas. But the basic issue remains to be addressed: banking oversight and regulation are not yet mature enough. As consumers take their contract grievances to their banks, and perhaps eventually to court, there is a chance to resolve their particular cases. But more importantly, the structural weaknesses in the sector and the laws that govern it, which have allowed these disputes to emerge in the first place, must be remedied.