Banks have been on a quiet campaign since the beginning of last year to milk more money out of existing customers, raising fees and interest rates on everything from credit cards to mortgages. The changes have mostly been small and incremental. Abu Dhabi Commercial Bank last February raised the late fee for credit card payments from Dh125 to Dh150, a move copied by many of its peers. HSBC, meanwhile, decided to cut credit card spending limits for many customers, virtually ensuring that some would breach the new limits and incur fees as a result. Other banks have made significant changes to credit card interest rates. Mashreqbank, for example, has raised rates on its classic card from 2.49 per cent per month at the end of 2008 to 2.99 per cent now. While the new rate is close to the market average in the UAE, that still equates to a rise in annual interest from 34.3 per cent to 42.4 per cent.
While moves like these have surely been disappointing for consumers, none of those changes seemed destined to provoke a major revolt, given that banks clearly had a legal right and a commercial need to make them. Defaults were up, especially on unsecured personal debt. The raft of new customers banks once relied upon to fuel revenue growth all but collapsed during the financial crisis. And the cost of bringing in new lending money rose significantly.
The natural reaction for banks was to reduce costs by laying off staff and cutting away administrative fat while trying to raise fees and interest rates without driving away existing customers. For the most part, they have done so successfully and have avoided drawing much attention. A recent decision by Mashreq to change the way it calculates interest on variable-rate mortgages, however, has turned banks' heretofore subterranean fee-raising campaign into a very public dispute.
A group of about 70 customers is complaining that Mashreq has removed the Emirates Interbank Offered Rate (Eibor) as the basis for interest calculations, a change they say will raise their monthly payments by as much as 30 per cent. In contrast to the incremental fee and interest rate hikes banks had previously foisted on customers, significant money is involved this time around, and the customers have raised questions about Mashreq's contractual right to make the changes.
The Mashreq case raises all kinds of issues about the rules of engagement between consumers and banks, not to mention questions about contractual rights that could have far-reaching effects on how other lenders deal with their borrowers. Fundamentally, though, Mashreq argues that Eibor no longer reflects its cost of funding, which has risen substantially as the financial crisis has dragged on. The bank is also right to point out that property prices in Dubai have declined substantially - estimates vary, but it is generally accepted that they have halved in some parts of the emirate - and put it in the unenviable position of having large loans on its books that are worth more than the properties that back them.
Mashreq's case, in short, is a commercial one. The customers who are disputing its interest rate change, however, make a contractual one. Their mortgage agreements simply do not allow the bank to alter the basis upon which it calculates interest, they argue, irrespective of commercial factors that appear to justify just such a change. Mashreq, of course, counters by saying tweaking the interest rate calculation is permitted by loan documents.
While it is shaping up to be the most colourful and best-publicised example yet of how financial crisis-induced economics is forcing customers and their banks into conflict, the Mashreq case should also be seen in its wider context: as both a sign of the times and a warning for bank customers. Mashreq isn't the only bank in the UAE that has made changes to the way it calculates mortgage interest, and is certainly not alone in raising rates and fees on other products.
For consumers, the lesson to be drawn from this fee-hiking trend is clear: caveat emptor. Buyer beware. It is relatively easy to get a fair shake from banks in boom times, when lenders are fiercely competing for business and need to lower their charges on loans to do so. In leaner times, however, it becomes much more difficult to wrangle a good deal on a credit card, a personal loan, a car loan or a mortgage. That means putting in the work and shopping around.
But the move towards higher fees and interest rates also serves as a warning against borrowing heavily using credit cards and other unsecured forms of debt. Even in the good times, carrying a credit card balance in the UAE made little sense given the norm of above-30-per-cent annual rates. With today's even higher rates and added fees, charging up purchases on credit cards can only be called irresponsible.
afitch@thenational.ae