Just say no to pressure of taking on debt

Life is getting more expensive in the UAE, but do we need banks chasing you around malls to sign up to their latest product?

Walking out of the office one fine evening last week as I was enjoying the onset of autumn, I spotted a banker who had managed to pin down a work colleague as he exited the building and passed the car park.

The banker was getting him to fill out an application form on the bonnet of an SUV and was watching with a measure of satisfaction.

I didn’t have enough time to figure out what the agent of the bank had managed to get my colleague to do, but I could see him filling out his details on an application of one of Abu Dhabi’s biggest banks. It was likely for a credit card or a personal loan, as such practices have been widely reported by residents here. I myself was propositioned by a suited banker last year, a young man who told me that he worked for an agency hired by the bank to roam the scorching streets in search of new customers. I thanked him for the offer and bade him a good day.

In a free market I guess that’s fine, but there are situations, such as when bank employees chase people in malls, that seem exploitative and flirt with moral hazard. Exploitative because the bank is taking advantage of our propensity to live beyond our means and tries to catch us at a point of weakness when we want the hi-fi, the new couch or gold necklace but don’t quite have enough cash to book it.

A recent survey undertaken by Al Etihad Credit Bureau and paid for by Citi showed that in Dubai, the city of conspicuous consumption par excellence, most consumers used credit to buy luxury goods.

There are situations of course when illness strikes a family member who might not to be insured, and we rightly take out a loan to help. But barring that and getting mortgage to buy a home, it doesn’t seem particularly wise to take on much debt, especially to buy a depreciating asset.

Life is getting more expensive in the UAE, and the fact that many landlords insist on taking rent for a whole year in advance means that many of us also have to get a loan to pay for it. There are many people who also take on debt to pay school fees.

“This is the only place I’ve ever lived where landlords ask for one, two or three cheques for the whole year’s rent,” Tony Graham, the head of consumer banking at United Arab Bank, told me this year.

There are times when getting a loan can make sense, if you have the ability to pay. When inflation is high, as it is now, getting a secured loan such as a car loan can make some sense if you are planning to stay in the UAE for the long term and will hold the car for at least the tenor of the loan, if not longer. But that does not mean that it is, necessarily, advisable.

Rising levels of household debt are not just anecdotal. The number of loans taken out by UAE residents in the first quarter of the year increased by 6.5 per cent from a year earlier. Between March 2014 and March this year, consumers took out a total of Dh1.3 trillion in personal loans, according to National Bank of Abu Dhabi.

And the UAE has one of the highest levels of household indebtedness, at about US$95,000 per household, according to bank executives.

The central bank of the UAE has moved to protect consumers in recent years by setting limits on penalties – for instance, ones imposed on consumers wishing to repay debt early.

While banks have done some work in trying to educate consumers, there is still a measure of palpable cynicism when it comes to targeting consumers.

When I asked a banker recently if he thought sending bankers to chase customers in malls was ethical, he did not seem to think it wasn’t, comparing the side effects of debt with the possible side effects you might get by being sprayed with a sample of perfume in the mall ... such as a skin rash.

But debt can be worse than coming out in spots. The stress of paying off a loan may, among other things, provoke a nasty little reaction in the financially thin-skinned, as well as other ailments. Don’t make a rash decision that you may regret.

This continues our series of weekly analysis articles by a rotating group of The National’s beat reporters. Mahmoud Kassem covers banking and finance