Almost three years since the financial crisis, and UAE banks have learnt their lesson. The trend of chaotic consumption in the Gulf state, which once induced enviable rates of growth among the region’s leading lending institutions, has subsided, and seemingly banks are more than happy for things to stay that way. At least for the time being.
The reality of the situation can be seen in the Arabian Business debt survey. Asked whether they had a personal loan, and 62 percent of respondents said no. The results are as expected amid a prolonged period of banks reining in lending. Evidently, they suffered a rude awakening in 2009, when the global economic downturn not only exposed loose lending policies in the emirates, but a lack of a strong regulatory body. It was then that credit conditions toughened, leading to a ten percent decline in personal loans in the first quarter of the year, compared with the end of 2008, according to data from the central bank. The level of personal loans continued to shrink over the rest of the year, and by October 2010 loans to the private sector had been down for eleven months in a row.
Today, banks are still cautious. Yes, 38 percent of readers reported having a personal loan, but analysts say this could be due to high levels of lending among UAE nationals. “I would say that personal loan penetration is fairly low in the UAE, particularly among expats, though it may be higher among locals,” said Moody’s analyst John Tofarides.
“Most of the banks focus on lending to UAE nationals,” he added. “Expats tend to take out mostly auto loans, mortgages and credit cards, or borrow on collateral. Banks don’t like to give unsecured loans to expats, they would rather give them to nationals who work for the government and who are unlikely to lose their jobs.”
Given the circular released by the central bank at the beginning of this year, which capped personal loans at 20 times the salary or the monthly income of a borrower with a repayment period set at 48 months, many analysts feel that banks will maintain a conservative approach to retail lending, despite signs of revival and improved liquidity in the OPEC member’s banking system. “I don’t think we are going to see a rise in the number of personal loans after the circular that was sent out by the central bank in February,” said Tofarides. He added that we could potentially see a rise in commercial loans after the UAE Central Bank issued a statement to banks to lower interest rates in order to stimulate the economy.
Other analysts are more optimistic. In April, the general manager for consumer and elite banking at National Bank of Abu Dhabi Suvo Sarkar told Reuters he expected a steady increase in retail lending over the next five years. “[The year] 2009 was probably was the lowest in terms of numbers, up to mid-2010,” he told the newswire on the sidelines of a retail banking conference in Dubai. “But from the second half of 2010, we’ve seen a 15-20 percent pickup from those numbers and we see that continuing for sure.”
As for the amount people are borrowing, the Arabian Business debt survey revealed that the biggest amount was in the bracket AED100k-250k — with as many as 40 percent of borrowers. According to Tofarides this is fairly normal, with the central bank advising that lenders stay below the AED250k mark. “The amount of people borrowing above AED250k will be very small because the central bank has advised banks not to lend above that amount. If they do they have to report to the central bank.” He added: “Also, when banks lend money they take into account salaries. It therefore makes sense that the majority of loans are in this bracket.