Banks brace for major rule changes

The Central Bank is finalising a fresh round of consumer lending rules for retail banks in the UAE, with credit cards, personal loans and mortgages under discussion.

Last May, the Central Bank implemented a raft of new measures intended to put an end to a free-for-all in consumer banking that left many consumers heavily indebted. Ryan Carter / The National

The Central Bank is preparing an overhaul of its retail banking regulations by May as part of what is being billed as an annual review of consumer lending in the Emirates.

Credit cards, mortgages and personal loans are all under discussion for further regulation, after an attempt last year to curb excessive lending fees was heavily resisted by the banking sector.

"The plan is to review the effect of this regulation annually … based on feedback from the sector and from customers," said one source at the Central Bank familiar with the discussions, the conclusions of which could be revealed as soon as this week.

Banks are bracing for a cap on credit card interest rates. Some bankers speculate the limit could be 1.5 per cent per month.

Retail bankers have grumbled that increased regulation will be among the factors impeding their revenue growth this year.

Last May, the Central Bank implemented a raft of new measures intended to put an end to a free-for-all in consumer banking that left many consumers heavily indebted.

Credit cards and loans for vehicle purchases were also regulated.

Banks, dismayed by the speed of the reforms, successfully lobbied to delay the implementation of the new rules by one month, and managed to bring about the establishment of a number of Central Bank committees to discuss implementation of new lending rules.

Many aspects of consumer finance had come under discussion at the Central Bank, said Mohammed Zaqout, the head of Al Hilal Bank's personal lending group.

"We know, for example, that mortgage regulations are coming out soon — they've told us that," he said. "Personal lending interest rates are also being looked at."

An easing of regulations on structured products had previously been discussed as targets for Central Bank regulation.

One possibility under discussion is that the proposed cap on interest rates will take the form of a subsidy on lending for UAE nationals, said one banker with knowledge of the talks, asking not to be named.

The cap on interest rates could be potentially tied to a Dh10 billion (US$2.72bn) fund aimed at paying off the debts of UAE nationals, established on National Day last year, the banker added.

Banks have expressed a desire to prevent that fund from acting as an escape clause for individuals, allowing them to rack up further debts, said Tom Smith, the head of retail banking at United Arab Bank.

"For a bank, obviously it's a double-edged sword," he said. "A loan gets cleared, but you don't have the ability to have that customer as a future loan customer. It also creates moral hazard."

The proposed cap on interest rates is being viewed with concern by some banks, Mr Smith added.

Because the country lacks a functional federal credit bureau, banks have no ability to assess customers who have spent to the limit on multiple credit cards and to price their products with that information in mind, he added.

Creation of the credit bureau "would be the single best thing that could happen in this market", he said.

Personal lending grew by 2.6 per cent to Dh253.7bn between January and November last year, according to the latest available data from the Central Bank.

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