How to tackle zombie bank accounts in the UAE

If you have left your savings stored in the same account for a long time, you may find it is paying virtually no interest and is effectively a zombie account - one where the bank has let the profit rate dwindle to almost nothing.

Zakrigianto Tedja left the bank he had been with since 1991 for a better money manager and a savings account with a 2 per cent yield. Satish Kumar / The National

Be warned, your wealth is under threat. The danger comes from so-called “zombie” savings accounts, whose numbers have multiplied since the financial crisis.

A zombie savings account is one where the bank has gradually let the interest rate dwindle to nothing, leaving thousands of unsuspecting customers getting a near-zero return on their money.

These accounts may seem alive, but they’re effectively dead. Meanwhile, the same bank is offering far livelier rates to attract new customers.

If you have money sitting in a zombie savings account, or with an underperforming wealth manager, it’s time to get it out of there, before it really sinks its teeth into your wealth.

Zakrigianto Tedja, 53, managing director of Arabian Indonesian General Trading Company in Sharjah, had been with the same bank since 1991 but was disappointed by the rate he was getting on his savings. He also felt his investment portfolio had been poorly managed by his wealth manager.

So he decided to look for a better deal, and after a tip from a friend, opened an account with RAKBank. “My friend said it was a really good bank, with faster, better service, so I gave it a try,” he says.

Mr Zakrigianto, who is a native of Indonesia but has lived in Dubai since 1989, switched his money to the RAKBank Fast Saver account, which pays an interest rate of 2 per cent, far more than he was earning on his savings before.

“Better still, my new relationship manager is very, very good. He keeps me informed of my investments options and has already made me a lot of money,” says Mr Zakrigianto.

In today’s low-interest world, where so many savings accounts pay little or no interest, 2 per cent represents a market-leading return.

You can’t expect to get that kind of return on all your cash savings, says James Thomas, regional director at Acuma Wealth Management in Dubai. “Everybody should have a pot of emergency cash as a buffer in case you’re hit by an unexpected bill, such as having to book a flight or repair your car. This money should be kept in a low-risk, easy access savings account, where you are only likely to earn minimal interest.”

Mr Thomas recommends holding between three to six months’ salary in the account. “That should cover most eventualities. But don’t leave too much in this account, as you will generate little or no interest on the money.”

Once you have your emergency cash buffer, you need to put your extra wealth to work. One option that is often overlooked are fixed-deposit savings accounts, which can pay rates of 4 or 5 per cent.

However, many of these accounts have a notice period, with penalties for early withdrawal. “Only tie up money away if you don’t expect to need it during the fixed term of the savings plan,” Mr Thomas says, adding that it’s not wise for expats to put all their eggs in one basket either, such as leaving too much money in any single offshore bank or jurisdiction. This can backfire if the bank or country runs into problems he says, as savers in Cyprus discovered last year when they were banned from withdrawing more than €300 (Dh1,490) a day of their own money from its banks, while the IMF sorted out the terms of a banking bailout. Eventually, savers with more than €100,000 in the bank lost almost half of any money above that threshold.

Mr Thomas adds that many expats do not want to leave too much wealth in the UAE in case it leads to inheritance tax issues when they die.

One reason so many UAE savers are trapped in zombie accounts is that they invested in high-interest fixed deposit accounts during the financial crisis, when banks were paying top rates to attract liquidity, says Ambareen Musa, founder of the price comparison site Souqalmal.com.

“In 2009, you could earn up to 7 per cent a year on a fixed deposit of 18 months. With the economy back on track and the need for liquidity falling, you won’t get that kind of return today. Unfortunately too many people have left their money where it was, rather than shopping around for a better rate.”

If you’re getting a near-zero return on your savings, its spending power is falling in real terms year after year, Ms Musa adds: “Although prices in Dubai are increasing slowly, rents and property values have accelerated significantly, so you need to make your money work as hard as you can.”

Savers can secure top rates of up to 5 per cent, but you need to read the fine print on the account, Ms Musa says. “The UNB Fixed Deposit Account, for example, pays a headline rate of 5 per cent, but it is a ‘step’ account, which means you only get 5 per cent for the final month of the 18-month term.”

Savers in the UAE are lucky, because they can still get an inflation-beating return, says Tom Elliott, international investment strategist at independent financial advisers Devere Group. “CPI inflation in the UAE was 2.1 per cent in April, so a deposit in a local bank that pays 4.5 per cent is worth 2.4 per cent in “real” terms. That kind of gain for the zero volatility of cash is attractive.”

However, Mr Elliott says savers still shouldn’t leave too much of their wealth in cash over the longer term, because you can generate a much better return elsewhere. “Over time, a basket of global equities will outperform cash, and the longer the time period, the greater the outperformance,” he says. “From 1900 to 2000, a holding of UK equities delivered an average return after inflation of 5.8 per cent a year, UK bonds returned 1.3 per cent and cash delivered 1 per cent.”

With the global economy beginning to grow, stocks and shares should continue to outperform bonds and cash, Mr Elliott adds. “If you’re investing for the long term, I would suggest buying back into emerging stock markets such as India, which should recover after the recent sell-off.”

Property has been the opposite of a zombie investment. If anything, the market has been too lively. While low interest rates have destroyed savings accounts, they have turbocharged property prices.

UAE residents won’t be surprised to see that Dubai was the fastest-growing global property market in the year to April, with prices up 27.7 per cent in that time, according to new research from Knight Frank.

While the market is slowing after rising a relatively modest 3.4 per cent in the first three months of this year, Knight Frank expects prices to pick up speed in the next few months, with no sign of a global property crash.

Fixed interest savings account, equities and property can all help you beat the curse of the zombie savings account. But invest cautiously, don’t overstretch yourself and take independent financial advice if necessary, because they can also pose a threat of their own.

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