The Central Bank of the UAE’s decision to revise its caps on the fees and commissions applied to banking products and services helps to bring the nation’s banking sector in line with international standards by raising transparency levels.
Being open about the fees applied to a bank’s products and services is key to any banking sector as it instils an element of trust between the lender and the borrower. At a time when some UAE consumers are struggling with high level of indebtedness due to cost-of-living struggles, poor money management and low financial literacy levels, the revisions will help to alleviate their pain.
According to Abu Dhabi Islamic Bank's moneysmart index released in May, almost half of UAE residents (48 per cent) struggle to meet their debt repayments each month compared to 31 per cent in 2014.
This the second time in recent years the Central Bank has issued new guidelines on the charges banks can make to consumers. The latest caps are an Amendment to Annexure 2 of the Regulations Regarding Bank Loans & Services Offered to Individual Customers, issued in February 2011 to help curb rampant lending in the wake of the global financial crisis.
The regulations introduced seven years ago limited loan amounts to 20 times a customer’s salary and repayment periods to 48 months as well as introducing a limit on how much of an individual’s salary can service debt repayments.
What is significant about the latest changes is that banks must publish them on their websites to further increase transparency. The fees will also be reviewed annually to “ensure that consumers are appropriately protected”.
Consumer experts say the caps will ensure more vulnerable customers avoid getting trapped by their debt. However, the caps could also strengthen the banking sector; if banks are recouping less in fees, they will need to improve their risk systems and potentially reject customers not suitable for high levels of debt. And lower fees on mortgage lending could boost the property market by encouraging home ownership at a time when the market has flat-lined.
The caps also complement a series of measures by the UAE over the past month to attract foreign investment and diversify the economy from a reliance on oil revenues.