The UAE Central Bank has directed lenders to help reduce the debt burden of Emiratis, although it has not specified how this should be done. The Central Bank is rightly concerned that some individuals have unaffordable monthly instalments for personal loans.
Efforts to implement such a directive must be dealt with very carefully to avoid any unintended consequences for the economy or the financial system.
They should not be seen to compromise the principle that everyone has a responsibility to repay the debts that they incur. This is the basis of global economic activity and the international financial system and is the backbone of business confidence. Any perception that banks will have to accept an arrangement that will be detrimental to their business will not be good for investor confidence. However, the Central Bank has made it clear that any solution should be a result of more cooperation between the agencies concerned.
It must also be clear to those that ultimately benefit from the proposal that any assistance is simply an effort to help them through difficult times. It cannot be perceived as a personal bail-out and an opportunity to accumulate more unsustainable debt. A mechanism must be put in place to ensure that those who receive help are held accountable for past and future debts. They should also be taught how to manage their finances more responsibly in the future.
While banks have a responsibility to try and ensure that those they lend money to can afford the repayments, the private sector cannot be expected to incur losses to implement social policies. And, while rescheduling repayment might reduce the monthly instalments, extending the period of the loan will cost customers more over the life of the facility.
Government assistance to those in need can best be done through direct social grants, rather than by interventions in the free market.
