As recently as a year ago, it would have been hard to imagine consumer debt being at the forefront of many people’s concerns in the UAE. Even if it was bubbling under the surface, it kept a resolutely low profile.
But the drop in global oil prices has forced residents to take a harder look at their finances, as it brought the stark realisation that the days of carefree borrowing and spending may be, if not gone completely, then certainly on hiatus.
For both Emiratis and expatriates, refinancing mortgages, and looking to bring debt amassed through credit cards and personal loans, under control has now become a high priority.
There has been a spike in cases of UAE residents looking at debt consolidation. Due to the sensitive nature of the topic in the light of the current economic scenario in the UAE, most banks GN Focus contacted declined to comment. However, in a November 2015 interview, Jamal Alvi, Chief Credit Officer for Retail Banking at Abu Dhabi Islamic Bank, said consolidation applications to the lender had doubled since the summer of that year. “We have seen the volumes double over the past three months alone,” said Alvi at the time.
UAE banks are creating solutions for those in debt after the Al Etihad Credit Bureau began to issue consumer credit reports. Lenders now have a clearer picture of any outstanding loans a customer has and it becomes a safer, less risky option for banks to lend for refinancing or debt consolidation.
Suvo Sarkar, Senior Executive Vice-President and Group Head of Retail Banking and Wealth Management at Emirates NBD, has noticed a refinancing boom: “Debt consolidation has become popular to consumers primarily for convenience of servicing only one loan payment instead of multiple debts. At the same time, they will benefit from reduced interest through settling other expensive debt.”
Liability settlement products are now being offered by leading banks in the UAE. To qualify for a consolidation loan, applicants must be in a permanent job and earn more than Dh5,000 a month.
If people struggling with debt are considering consolidation, Waleed Barhaji, Business Head of Consumer Finance at Noor Bank, is clear on why they should take this route. The first reason, he says, is there are savings to be found if consumers get wise.
“They are likely to get much better pricing on one large salary transfer-backed facility with their bank, compared to multiple other facilities such as credit cards and non-salary backed loans with multiple banks,” he explains. “That results in a lower monthly instalment, and hence a lower total debt cost.”
Consolidation, he says, remains convenient and can save money, whatever the economic backdrop. “We are seeing a moderate shift on consolidation in terms of what is consolidated as part of a new finance facility.
“Earlier, we’d see customers moving one personal loan/financing arrangement, and maybe a card, from the same bank to another bank to capitalise on lower rates, and therefore savings. We’re now seeing more customers actually consolidate multiple facilities across multiple banks.”
One purpose of doing this is to save money, but Barhaji says in many cases it is out of necessity rather than choice, due to the arrival of the credit bureau. “Banks can now view total outstanding amounts across all lenders and need to settle and consolidate several facilities to meet regulatory requirements [around the maximum debt service ratio].”
So if customers have made up their minds to take the refinancing route, what should they be looking for, and what should they bear in mind? Switching banks is often considered to be a quick-win option, but “there is definitely a cost involved”, says Barhaji.
“The UAE Central Bank permits banks to charge up to 1 per cent of the outstanding amount, subject to an Dh10,000 ceiling, if a customer pre-settles, even when the facility is being settled as part of consolidation with another bank.
“The new facility would also involve some upfront charges. Most banks charge processing fees, and several have a mandatory insurance charges.”
Another thing to keep in mind is the debt burden ratio that banks consider when assessing applications, says Barhaji. The 50 per cent debt burden ratio means repayment for all liabilites must not exceed more than half of your monthly salary.
View consolidation as a solution to get out of debt, rather than the opportunity to borrow more, says Chris Ferguson, Director of wealth management firm Credence International. “A consolidation loan should only happen once, not several times. You need to discipline yourself to stop incurring more liabilities, so as not to repeat the cycle and get further into debt.”