The Debt Panel passes verdict on UAE residents in financial dire straits

The Debt Panel – a new initiative from The National to help readers in chronic debt resolve their issues – has launched. But for the four panelists answering the letters, the biggest issue to resolve is regulation of the UAE's banks.

Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com. Ravindranath K / The National

Abdul Wahid Khan is a man with many problems.

Not only is he in Dh533,000 of debt, his instalments are more than his entire monthly salary.

And no one can help him.

"I have three loans with three different banks. One is a salary transfer and two are without salary transfer. I also have three credit cards," he told The Debt Panel, an initiative from The National, at its first meeting this week in Abu Dhabi.

The Debt Panel brings together four financial experts: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank (ADIB); Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com; Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life; and Keren Bobker, The National's On Your Side columnist and an independent financial adviser with Holborn Assets in Dubai.

Together they will answer queries in a weekly online column to help readers better tackle their debts. And at the session this week, they called for further regulation of the UAE’s banks to help prevent UAE residents, such as Mr Khan, from becoming over-indebted.

"Now I am earning approximately Dh14,360, but every month I am paying for the loan approximately Dh15,000 and beyond that there are three credit cards I have to make the minimum payment on. Sometimes I cannot make the minimum payment on the credit cards. Every day I suffer with calls from banks," says Mr Khan, 36, from India, one of hundreds of readers to write to The National in recent months about their liabilities.

The health and safety adviser moved to the region in 2005 and lived within his means until two years ago when he moved to the UAE, where he received two complimentary credit cards with his salary transfer bank account.

He started using the cards, which had limits of Dh10,000 or Dh15,000 in December of 2014 and had maxed them both within a month.

He took out his first loan early last year and has since taken on two more. He now owes more than half a million dirhams and wants to settle the debt and stay in the UAE, but every bank he approaches for a consolidation loan turns him down because of a law brought in to prevent situations such as his.

Introduced in 2011, the 50 per cent debt burden ratio (DBR) regulation states that repayments for all loans and credit cards must not exceed 50 per cent of a person’s monthly salary.

The problem was that until the Al Etihad Credit Bureau started issuing reports on people’s credit levels in 2014, banks relied on applicants telling them how much debt they already had when applying for loans.

Mr Khan says the bank salespeople who sold him his loans and credit cards advised him to hide his existing obligations to get around the rule. His current DBR now stands at more than 100 per cent.

“The reason why you are feeling trapped today is because when a credit bureau sets up in any country there is a level of adaptation,” Ms Musa of Souqalmal.com, told Mr Khan at The Debt Panel’s launch event.

“Because of what you are facing, banks will not give you a loan if you have more than 50 per cent DBR anyway, so it is a necessary act for the future and to build a seriously decent banking system for it to grow and flourish and to protect the consumer. But there will be a few years of adaptation where all these people will come out and say I cannot get a consolidation loan to pay off my debts.”

Over time, the credit bureau – which keeps a record of everyone’s credit obligations in the UAE – will protect people from getting into this situation, says Ms Musa. But it cannot do anything to help them now.

“We see this quite often, but luckily we don’t see this a lot in the sense that overleveraged customers are a small proportion of the total people who have borrowed in the market,” Mr Alvi, of ADIB, told The Debt Panel. “That’s why the market is still sustaining itself.”

He says banks are actually quite cautious when it comes to assessing a person’s debt burden but admits that they must shoulder some of the blame for creating overleveraged borrowers.

“The process where I think the lenders have been irresponsible is the sales model they have been following, which is this third party direct salesforce which goes out and seeks people,” says Mr Alvi.

“It basically gives these people an idea of why don’t you take this credit card and then [they think] this 36-inch LCD TV I have been putting off, maybe I can buy that now. So I think this is where the problem is. Some of the sales structure or sales model banks follow has to change and as this bureau gets embedded, I think we will see a gradual improvement because people will just not be allowed to over-borrow.”

But for those who borrowed before the current regulations came into place, there is nowhere to turn.

Marcus Perez, 38, who also attended The Debt Panel launch to ask for help, owes Dh245,000 in four loans and one credit card.

The customer services worker, who asked for his name to be changed for the article, pays Dh8,539 in instalments each month against his monthly salary of Dh9,283.

He moved to the UAE in 2006 and took out his first loan in 2012. The following year he took out two more and then applied and received a fourth in 2015 – all to pay for the rebuild of his family home in the Philippines, which was badly damaged by Typhoon Haiyan in late 2013.

He pays the instalments for two of his loans regularly, but only manages to make repayments on the other two intermittently as he also sends money home to his family. His mother is currently undergoing treatment for breast cancer.

“I don’t have a good night’s sleep because every time [the collections departments] are calling me I develop a fright. We have something in common, Mr Khan and I,” he told The Debt Panel.

Like Mr Khan, his consolidation loan applications are rejected each time.

Debt panellist Ms Bobker of Holborn Assets says the UAE needs more regulation when it comes to credit card and loan sales.

“A lot of people have been foolish and reckless in their borrowing, but they may not have the education that people in the banks should have, so it does have to come down from the banks. I really feel we need way more regulation here, which I am not sure will make me terribly popular,” she says.

Mr Alvi would argue that banks are already subject to enough regulation.

“We as a banking industry feel that a pendulum has swung a bit far too right, we are being over- regulated. But we understand why it has swung because there was no bureau and there was excessive lending from multiple banks to a very small section of the population, so we are kind of prepared to see this over-regulation as the market matures. Then we expect that the level of regulation will ease a little bit,” he says.

Mr Khan and Mr Perez say they are often told that the credit bureau and the DRR law are to blame for being turned down for consolidation loans.

But in reality, there is no law which prevents banks from lending more money to those in their situations. To meet the requirement, banks just have to extend the tenure of the loans.

“If he has three debts and his debt burden is 90 per cent, there is no restriction from the regulator which can prevent me from restructuring his three loans over a period of 10 years, of 15 years or 20 years, so reducing his monthly instalment and therefore his debt burden,” says Mr Alvi.

“The question really is then, would any lender be comfortable restructuring a debt to an expat over such a long period? There it really becomes an issue of risk appetite.”

All Mr Khan and Mr Perez can do now is hope a bank will take a chance on them again.

“Now the problem is the water is above my head. I want to pay as soon as possible. This is what I want,” says Mr Khan.

However, Debt panellist Ms Khatun Khan of Design Your Life warned that even if someone in severe debt could persuade a bank to offer them a consolidation loan, it is only part of the answer. “Let’s say a bank is prepared to consolidate that debt, what will happen if it’s the lifestyle to blame? The debt will just recur,” she says.

“The ultimate question is: if you can resolve this debt issue, can you still afford to live here or in a few years’ time, will you be faced with the same issue again? If the answer is yes, you really need to consider, should I still live here?”

Read about the dangers of compound interest on your UAE credit card at thenational.ae/blogs/your-money

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