Financial consumers review 2013: brakes on to stop economic recklessness in UAE

Brave investors with money to burn may have reaped rewards from riskier bets on the UAE’s economy this year, but the Government has taken a keen eye to financial regulation intended to keep the man in the street out of trouble.

Surging stock markets and property prices might in earlier years have been greeted with an exuberant cheer. But banks and regulators nevertheless are taking preventative measures, fearing a repeat of millions of cheque defaults and absconded borrowers that characterised the last financial crisis.

Taxes on property transfers, a cap on mortgage values and the establishment of a federal credit checking system are among the many new measures intended to put a brake on recklessness by banks and consumers.

But with the flurry of new rules comes concern over how much the Government can regulate without choking off the UAE’s economy recovery.

Banks have reacted “positively” to the changes in rules, in the hope that the industry can escape the excesses of the last boom, said Ambareen Musa, the chief executive of Souqalmal.com, the price comparison website.

“As much as the consumer is protected, from a getting into debt perspective, the banks are protected against bad debts and losses,” she said. “Nobody wants to go through 2009 again.”

There are clear signs of a rebound in consumer borrowing, after many years of stagnation.

Personal lending has increased by Dh24.2 billion so far this year to Dh285.1bn, outstripping the lending growth to the wider UAE economy and reflecting nine consecutive months of new loan underwriting.

It is against this backdrop that the Ministry of Finance has accelerated the launch of the Al Etihad Credit Bureau, appointing Marwan Lutfi as its chief executive in October as it begins operational trials.

The UAE’s first federal credit bureau is intended to give lenders a complete picture of a borrower’s indebtedness when it becomes fully operational in 2015.

The lack of a federal credit bureau meant that in the past banks were unable to assess whether or not a customer had spread multiple debts across several banks.

This was one of the major factors contributing to the spiral of bad debts that took place during the global financial crisis. If one bank pressed a criminal case for a bounced cheque, it often found a queue of rival creditors also seeking to collect these debts.

A total of 1.4 million cheques failed at the point of use last year, representing payments of Dh46.8bn lost to the economy.

The economic recovery has driven that total down from a high of Dh67.4bn in 2009, the year when debt restructuring at Dubai World spilled into a financial crisis for the UAE’s banks and an average one in 14 cheque payments was returned as invalid every month.

Nevertheless, the country’s financial sector has grown much bigger now after the crisis – the banks’ total assets in September, the latest month available, showed that banks’ balance sheets have grown by 31 per cent since the end of 2008.

Not all are convinced that banks have sufficient risk controls on their existing customer base.

Abdul Aziz Al Ghurair, the head of the UAE Banks Federation and chief executive of Mashreq, warned in September that bank customers could be so heavily indebted that “there will be no lending to anybody for six to 12 months” after the credit bureau begins operations as banks assess the financial health of their existing customer base.

The Al Etihad Credit Bureau did not comment on any of the recent developments.

The property market has also been a target of interest for the Central Bank. A long-debated cap on how much of a property purchase could be financed with mortgages was announced at the end of October, after a public dispute with the sector that began last December.

In a bid to remove speculative buyers, also known as “flippers”, from the market, the Dubai Land Department also increased transfer fees on property sales to 4 per cent, meaning those who play the property market aggressively will face higher costs than homeowners.

But not every move has been a tightening. The Abu Dhabi Executive Council removed a 5 per cent cap on rent increases last month, in a move that many real estate industry analysts expect will result in rents starting to rise once more.

business@thenational.ae