The UAE Central Bank has found itself in an odd predicament following its attempts to control the lavish personal loans local banks offer Emiratis and expatriates. On one hand, the Central Bank's moves have angered loan seekers. On the other, they are unwelcome to bank administrators, whose annual income and net profits depend heavily on personal and commercial loans.
To understand the nature of the problem between the Central Bank and other banking institutions, we have to acknowledge that financial services companies have the capacity to manipulate the rules and regulations set forth by the Central Bank. All banking institutions have professionals who can find loopholes and bend the rules and regulations to allow them to continue to give loans.
The rules, regulations and conditions set forth by the Central Bank contain wordings that, if changed, misinterpreted or bent, can reverse the original meaning intended by the Central Bank. Thus, banking institutions have resorted to hiring teams of lawyers and linguists to search for such loopholes in order to "legally" break the rules. These measures are intended to find ways to facilitate loans for clients.
With respect to automobile loans, for example, the Central Bank clearly stated that the client must pay 20 per cent of the car's total price in cash to prevent banks from financing its the total value. However, some banks have deviously got around this rule by establishing a car sales division with a separate licence, which allows them to sell the vehicles and finance the process simultaneously. This is a clear violation of the Central Bank rules.
Getting around rules
Other banks have resorted to issuing false statements to the effect that a client seeking a car loan has already paid the 20 per cent. The client then goes to a car agency to complete the loan process for the remainder of the amount. The bank finally charges for the full amount of the car. This is a clear violation of the Central Bank regulations.
The examples cited here are just a fraction of what really goes on behind closed doors.
The abuse of clients and the bending of Central Bank regulations include the exploitative practices of intentionally involving clients in high interest loans for prolonged periods of time. For example, if a client's end of service gratuity is Dh1 million, the bank will request a letter from the employer guaranteeing that the amount is transferred to the bank if the client loses his job. This letter can serve as a guarantee for the loan to the bank.
Such letters can be procured from virtually any employer in the country. While some banks will allow for no more than half a million in loans, others will raise the amount to up to one million (20 times the amount of monthly salary or equivalent to the end-of-services gratuity). Some banking institutions will even raise the amount to a million and a half.
The question is: do banks care about the humanitarian condition of the client after losing their job? How can a person live if all that they have saved just evaporates? How can they provide a life for themselves and their children?
False details on bank guarantees
For years, banking institutions were subject to fraudulent tricks. These include the client providing false information on guarantee documentations covering the amount of the loan.
Recent examples include some expatriates getting loans to buy luxury cars, and then leaving the vehicles behind as they fled the country. Emiratis end up in prison if they fail to pay.
The only way out of this dilemma is for the federal government to issue a unified law that would limit the financial facilities that banking institutions can provide clients and discourage locals from seeking loans without real guarantees.
An independent credit evaluation agency, that would evaluate any client and their assets against a loan facility, is currently not established in the UAE. So long as the current evaluation and granting authority is in the hands of banking institutions, loan crises will never disappear. They will worsen.
Safeguarding banks' money
The Central Bank is more in need of such an evaluating agency than ever. Logically, the evaluating agency must be completely independent of the granting institution. It must be a professional agency that guarantees the safety of banking institutions' money as well as the capacity of the client to meet their responsibilities.
