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The rule of unintended consequences

Central Bank has to protect country’s financial system, but regulation must be done with a light hand

Gulf News

The recovery of the property market in the UAE must be carefully managed to prevent the speculation that had damaged both financial institutions and consumers in the recent past.

However, the decision by the Central Bank to cap mortgages — at 50 per cent for expatriates and 70 per cent for nationals — is harming the realty industry. The high deposit now required has driven many potential buyers from the market. This has also reduced the banks’ opportunities to lend money that they have in deposits — their main business. This is why the request by the Emirates Banks Association, that the mortgage cap be reviewed and its implementation be delayed by a month, must receive positive consideration.

There is much that the banks can do to curb irresponsible borrowing and reduce speculation in the property market. They have offered to use the month to work together to develop a code of conduct to ensure that they at all times act as responsible lenders and reduce risk in their operations. Loans must only be extended to those who can afford them for sustainable investments.

The Central Bank has a duty to protect the country’s financial system, but in a free market, regulation must be done with a light hand and in consultation with stakeholders to prevent unintended consequences. By ensuring that they are responsible in their lending decisions, financial institutions can help the Central Bank and the property market, while protecting their business.