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In times of rising costs and high inflation, a popular way to cope is through taking loans, the question remains: just how realistic is this solution?
According to Douglas Beckett, head of Retail Banking at Mashreq Bank, loans, in themselves, are not problematic. However, it is when clients are unsuccessful in managing their assets responsibly and when they fail to repay their loans that they find themselves in hot water.
He said: "All of us use personal loans, but the challenge is in managing its repayment. This is possible if you borrow the right amount in order to pay back your loans comfortably, and if you ensure you have a certain amount saved for unforeseen calamities." In a thriving market like the UAE, residents are often tempted to take loans.
Beckett said: "In the unsecured loan market, growth in the first quarter jumped from Dh43 billion in 2007 to Dh48.4 billion at the end of March 2008."
This phenomenal 10 per cent growth reveals the profitable business money lending has become. The country's highly competitive banking environment adds to the situation.
Beckett said: "The primary task of managing one's loan repayment rests with the individual, but it is also the bank's duty not to give loans irresponsibly."
But how do banks behave irresponsibly? Some authorise significant amounts of unsecured loans for extended periods, often landing unwitting customers in deep debt. According to Beckett, this practice is "excessive". He said: "Ideally, such large loans should be provided after assessing each client's situation, and on a case-to-case basis."
However, the banks are not completely at fault. Frequently, they find it difficult to give customers comprehensive advice on their debt levels due to the lack of a fully operational credit bureau. Such bureaus would require compulsory submissions from all banks and ensure better accountability.
Beckett said: "Where self regulation is just not working, I encourage the central bank to regulate banks to curtail excesses."
Ultimately, loans can be a lifesaver or a killer. Beckett asserts that when customers point the blame to the long arms of banks, they do not realise that banks make profits from lending only when loans are repaid. He said: "I promise you, if you do not pay back your loans, the banks are not getting anything out of it."
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