The UAE's retail banking industry is ultra-competitive, with many banks competing for business from a relatively small population. As in other markets, financial institutions in the UAE have been impacted by the financial crisis with many consumers experiencing job losses and salary reductions. However, it now appears that the market is stabilising.
The fundamentals of the UAE's retail banking and consumer finance market are strong. A keen acceptance of credit products by consumers in the UAE has also been driven, in part, by the country's significant expatriate population, with consumers seeking to leverage credit facilities to live comfortably in the UAE during their period of employment.
With this has come a big increase in credit risk as consumer finance institutions became far less conservative in distributing credit. They relaxed the previous requirement to transfer the customer's payroll account to the lender. Banks also brought down minimum income criteria, leading to the extension of credit facilities to customers who did not have the ability or discipline to pay back loans.
From the customer perspective, an increasing dependence on bank loans to meet cash flow and fund lifestyle needs meant that the amount of leverage grew to an unsustainable level. The rising cost of living and property rental in the UAE, especially in Dubai, along with rising household expenses, led to consumers increasingly becoming dependent on credit, with some virtually living off cards and loans.
After growing at a rapid pace for several years until 2008, the UAE economy was significantly impacted by a sudden correction in property prices in September 2008. This created a rapid decline in investor demand for real estate properties, while the sudden supply of real estate by nervous sellers led to a steep decline in property prices.
The UAE economy was severely affected. Real estate construction companies, which employ much of the country's workforce, started laying off staff and contract employees due to downsizing and widespread delays in real estate construction projects.
Economic activity was also particularly affected in Dubai, where the dependence on the services industry is much higher than in Abu Dhabi, where the economy is primarily dependent on oil revenues.
Economic slowdown
Since the beginning of the economic slowdown in the fourth quarter of 2008, households have suffered a significant decline in disposable income due to a reduction in their salaries, redundancies and decreases in bonuses.
The composition of the local population in the UAE has also changed at a rapid pace as a result of the country's growing economy and increasing cost of living. Until the beginning of the credit crisis, real estate development and growth in the financial services sector led to an inflow of higher-income expatriates into the country. However this trend slowed down considerably during 2009.
The lower- to middle-income segment of the UAE's expatriate population is also declining as the higher cost of living has forced some lower-income expatriates to send their families back to their home countries.
It has been argued that an important step forward for the UAE's retail banking sector would be the establishment of an effectively functioning credit bureau under the auspices of the country's central bank.
Issuers in the UAE are also being forced to rethink their business strategies after some expatriate workers ‘skipped' the country and left behind a trail of credit card debt. More broadly, after years of easy credit and a booming economy, a portion of expatriates have been returning home due to job losses, particularly in the tourism, retail, construction and real estate sectors.
Looking ahead, Islamic banking is likely to be an important and growing segment of the market. Islamic banking started in the UAE with the incorporation of Dubai Islamic Bank in 1975.
Speaking in June this year, Sultan Bin Nasser Al Suwaidi, governor of the UAE Central Bank, said there were eight Islamic banks with 219 branches in the UAE. He added that deposits in Islamic banks totalled Dh183 billion as of December 31 last year — representing 18.7 per cent of the total deposits of the banking system.
Payment cards
The popularity of payment cards in the UAE also continues to flourish. It is estimated that there were around 199 payment cards per 100 adults in the UAE in 2008. This compares to only 62 cards per 100 adults as recently as in 2003.
As the market becomes more mature, customers — especially those at the premium end of the market — are looking to consolidate their banking relationships with fewer service providers. As a result, an increasing number of banks and credit card issuers are offering loyalty programmes that take into account the various aspects of a customer's overall banking services.
According to Lafferty Group's World Cards Intelligence (WCI) database, real GDP growth in the UAE is forecast to rise from 1.6 per cent this year to 3.3 per cent next year. As a result, it appears that following the sudden correction in property prices in September 2008 and its subsequent economic impact, the prospects for the country's retail banking and consumer finance sector appear stronger than they have been for some time. At a macroeconomic level, the UAE is also well placed to take advantage of any growth in the economies of the countries in the region as it has a modern infrastructure to service stronger trade and investment flows.
Speaking to Lafferty Retail Banking Insider last month, Arup Mukhopadhyay, executive vice-president and head of consumer banking at Abu Dhabi Commercial Bank (ADCB), summed up the situation. "There are many positive factors for retail banking in the UAE because it is a geographically small market with a very high per-capita income. The quality of life in the UAE is one of the best in the world and so the market can easily attract a talented workforce, which augurs well for the economic growth of this country. Banks in the UAE are extremely well capitalised, so all the factors are positive."
The writer is Head of Newsletter and Newswire Editorial at Lafferty Group, a global publishing and advisory house specialising in retail banking, cards and payments and personal financial services, providing industry research on 60 plus countries through its online research platform World Cards Intelligence. Its services include Lafferty Councils (member groups), international trade association management, newsletters and conferences.
