Many Emiratis Have Fallen Into The Trap Of Predatory Lending

Emiratis have been easy targets of irresponsible banks. Burdensome debt levels mean that the law and lending practices need to change 

By Taryam al Subaihi

Throughout the United Arab Emirates (UAE)'s short history, the banking sector has opened its doors to Emiratis, welcoming and approving applications for business and personal loans with their promise of wealth and prosperity.

Regardless of how absurd the requests, it seemed, the banks would always find a way around the red tape to approve loans, even for millions of dirhams. And the more money banks distributed, the higher the targets assigned to banks' lending agents. On an agent's desk, the green approval stamp never left the pile of Emirati applications.

"Go forth and bring in as many Emiratis as possible," the banking kings said, and so the loan agents went to all four corners of the UAE in search of trusting, inexperienced nationals who would sign over their lives after a 15-minute sales pitch.

Various strategies were used to ensure a continuous flow of loan applications. One example was the system of forced referrals: at the end of the loan application process, many banks required an Emirati candidate to provide the names of three other citizens as references to complete the procedure. It was a nationwide treasure hunt, with Emiratis as the pot of gold at the end of the rainbow for banks and loan agents.

Young people were targeted the most, with a specific focus on young college and university graduates. The perfect catch for a loan agent was a young national with a clean record, decent first salary and a naivety regarding the world of finance. Young people were guaranteed loan approval, in less than a week, for up to 50 times their monthly salaries - providing an excellent commission for the bank's employees.

And so began the rise of debt for many Emiratis. Many found themselves owing the banks millions of dirhams before they reached their late 20s.

This continued until May 1, when new regulations were implemented by the UAE Central Bank, capping the amount banks could lend in personal and car loans at 20 times the borrower's monthly salary, and setting the maximum period of loan repayment at 48 months. The rules also restrict the service fees lenders can charge for personal accounts, cheques and debit cards, and do much more.

Here is an indication of the degree to which this affected the process of lending: many bank employees were put on high alert in April to relentlessly bring in as many loan applications as possible before May 1, when the new Central Bank regulations were implemented.

The new rules were a breath of fresh air to many Emiratis, who were content that a system had been put in place that would protect their sons and daughters from the debt burden they had faced. The new rules should also help to educate young people on how best to borrow and how to deal with personal finance.

These new rules indicate, at the very least, that the previous regulations did not serve Emiratis well. In fact, many people are now in difficult positions when it comes to paying back the ridiculous debts they have accrued. This has led to legal action in some cases against Emiratis who were misled in the first place.

Dubai Police Chief Lt Gen Dahi Khalfan Tamim was right when he called recently for a change in the penalties for bounced cheques and similar mistakes. At present, police arrest people who fail to pay their debts or who write bad cheques. There is no trial in court. No case-resolution system is offered. It is as simple as the bank providing the cheque, and a nationwide warrant being issued immediately.

People facing a warrant are barred from travel and from using many government services. And they face imprisonment until the debt is paid or the case is dropped by the bank.

As Lt Gen Tamim suggested, a new system should be considered, in which an individual could be fined, rather than arrested, for writing a bad cheque. A failure to abide by the law after three fines could lead to further legal action. But the police should not be sent out immediately as loan enforcers for the banking industry. This is not their job and does little for their reputation, which is otherwise well-respected worldwide.

As I have mentioned, the Central Bank's previous rules and regulations were not ideally suited for the UAE. Many people have been misled into a life of spiralling debt. Although much of this is due to individuals' own misjudgement of their financial situations, there is also blame deserved for the absolute freedom that was provided to banks to lure people into outrageous loan schemes.

As the system has now been adjusted by the Central Bank to allow for more manageable loan repayments, so should we adjust legal procedures regarding failed payments by individuals who, simply by following the Central Bank's old regulations, found themselves facing serious financial problems.

-This commentary was published in The National on 02/09/2011
-Taryam Al Subaihi is a freelance writer from Abu Dhabi who specialises in corporate communications