Like many Indian expats living in the UAE, the financial services professional Robin Almeida took out personal finance to buy an apartment in his hometown of Mumbai. That was to take advantage of the substantially better interest rates on the dirham, which is pegged to the low-yielding US dollar, over the Indian rupee.
What Mr Almeida, 32, didn't bargain for when he decided to repay the outstanding Dh280,000 debt early this year is that his bank, Abu Dhabi Islamic Bank (ADIB), would ask him to pay future interest on the four-year loan set to expire in 2016. That meant not only paying the remaining principal but also a further Dh50,000 of the interest he would have paid the bank until the day the loan matured. Furthermore, he also had to pay 1 per cent of the outstanding loan amount for early repayment. In total, that amounted to around Dh53,300 in penalties in addition to the Dh280,000.
Mr Almeida, based in Abu Dhabi, said he was never told by the banker that issued the loan in 2012 he would have to pay future interest, a point he says he raised at the time. He says the banker no longer works with ADIB and that when he complained to the bank, he was told he doesn’t understand how Islamic finance works.
“My first question [when I took out the personal finance] was ‘suppose I want to make an early repayment, how much do I pay extra’?,” recalls Mr Almeida. “He said how much you have borrowed and on top of that, 1 per cent. I told him ‘are you sure about that?’ and he said ‘yes I am absolutely sure. You just sign here, here, here’. That was my mistake. Half the things were in Arabic.
"They said 'don't worry, it's Central Bank rules. And I said: 'OK, I trust you guys'. I signed it," he says adding that he asked for a copy of the document and was told the banker would scan it and send it over. "I never got it. It's been two years. He wrote on a piece of paper, 'this is your principal plus this is the other'. It was handwritten."
When contacted by The National, an ADIB spokeswoman said: "ADIB has offered the customer the maximum we are allowed to by the rules set by the Central Bank, which is fully in line with the standard banking rules applicable to this kind of facility. The contract signed for this financing is in English and Arabic, as are all of our contracts with customers. We can confirm that we do not offer any bonuses for finances which are settled without any default in payments."
Under Islamic law, personal loans are typically issued under a murabaha contract where the bank buys an asset and the borrower agrees to buy it back at a markup. In theory, early settlement does not exist in Islamic finance although banks have become more flexible about giving borrowers discounts for early repayments, says Ambareen Musa, the chief executive and founder of Souqalmal.ae, a price comparison website.
While Central Bank rules stipulate a maximum early repayment fee of 1 per cent on the outstanding balance, it can be at an Islamic bank’s discretion whether or not the customer also pays the future profit rate when settling a loan early.
“At the time of early settlement, the customer will pay the principle outstanding plus the 1 per cent penalty as per Central Bank,” says Mohamed Jamil Berro, group chief executive of Al Hilal Bank.
UAE banks have elevated their customer service credentials to secure retail clients as the margin of profit they get from individuals, where the risk is more accentuated and hence the interest rates higher, is more elevated than corporation clients.
Consequently, the fight for retail customers has intensified as the country’s economy recovers from years of stagnation, with more than 50 banks serving a population of 9 million. That’s amid record low interest rates and increased loan demand.
Islamic banks, which unlike their conventional counterparts do not charge interest but rather a pre-agreed rate of profit, have also been aggressive, ramping up their marketing campaigns to scoop up smaller accounts. Islamic banks currently have a 25 per cent market share, a figure expected to double by 2020, according to Emirates Islamic, which says market studies estimate that at 19 per cent a year, growth in Islamic banking will outpace the growth in conventional banking.
ADIB, which won Ethos’s top award for bank customer service in 2013, underwent its transformation after a management shake-up in 2007 that brought in the former Citibank executive Tirad Al Mahmoud. The chief executive attributes the bank’s rise to the top of the customer service ranking to its focus on keeping customers satisfied.
But not everyone is happy.
“There is no transparency,” says Mr Almeida. “There was no documentation over the number of years I’ve had this loan. I feel they used Islamic banking as a shield.”
However, the UAE has not been unresponsive to the rights of consumers. In 2011, the Central Bank introduced rules to curb personal lending and cap retail banking fees were introduced.
But unlike corporate clients, retail customers often do not have the level of financial knowledge an MBA-holding chief financial officer has and unethical bankers may foist as much credit on an unwitting consumer as possible to secure commission, says Ms Musa.
Many banks, however, have made moves to stamp unsavoury practices from outsourced sales forces by removing them from their payrolls.
“Today every single customer we get on board, every single one, will get a call back by a separate independent team,” says Jaydeep Gupta, the head of retail banking at StanChart. “They call and say ‘you have got in touch with X, Y, Z, this is the nature of the product’. These calls are recorded and communicates very clearly what are the terms and conditions of the product. Without it, the sale will not happen.”
There are, however, some signs of improvement. According to a recent survey from Souqalmal.com, 27 per cent of UAE residents would now recommend their bank to friends or family. That’s almost twice as many as in 2013, when only 15 per cent would do the same.
“Customers are increasingly active online and vocal about their experiences,” says Ashar Nazim, global Islamic finance leader at Ernst and Young. “Going mainstream and building a customer base that is based on added value to the customer has not been easy for Islamic banks.”
Transparency and disclosure have improved in the past couple of years, says Ms Musa. “There is a push to educate the customer more.” But she stresses that customers still need to take responsibility.
“You’ve got to make sure all your papers are in order,” she says. “If you don’t have anything on paper then be aware that in a couple of years the person you dealt with may no longer be there.”
The net result has meant banks now work harder to deal with all complaints, however small, particularly if the media is involved. When Gerson Sydney Dias, a UAE resident, was charged Dh12 interest for a credit card balance transfer to Abu Dhabi Commercial Bank, the bank quickly reversed the charge. "The due date on the statement was different from what they told me," he says. "When I called them at the call centre, they said it was not possible but when I sent emails to the media, the next day they reversed the charges."
Seven checks worth making
1. Shop around
Before committing, find out what the competitors are offering. Don’t be distracted by gimmicks and free gifts. The most important thing is the interest rate.
2. Fees, fees, fees
Banks will typically charge you a fee for arranging the loan. And there will be an fee for early settlement, typically 1 per cent, and a fee for late or missed payments. Make sure you know what these fees are.
3. Know the difference between a reducing rate and a flat rate
Don’t be fooled by rates that look low percentage-wise. Often lenders will advertise the flat rate, which does not reflect the actual cost of the loan. The real rate you will be paying is higher and is called a reducing rate.
4. Calculate the total cost of loan
Add the fees and the total interest to understand the real cost of the loan. Read any documentation carefully before signing, even if your banker says it is just formality.
5. Different rates for Emiratis and expats
Most banks will give preferential rates to Emiratis because the risk of default and flight is less.
6. Preferential rates if you transfer your salary to the bank
Banks generally offer better rates if your salary lands in your account each month. Before you switch banks, check you are really getting a better rate elsewhere. Sometimes negotiation works.
7. Do your homework
Ask yourself if you really need the debt. Also, remember, the longer the tenure the more the loan will cost you as you will be paying interest over a longer period. Try to spread repayments over as short a time as possible.
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