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Abu Dhabi based Finance House recently entered the gold loan space, with the promise of speedy disbursals. Other lenders could be making an try soon, banking sources say Image Credit: Gulf News Archives

Dubai: More financial institutions in the UAE could launch gold-backed loan schemes, creating opportunities for SME owners and individuals to make better use of their gold and jewellery assets. Gold has been one asset that’s been holding its own through recent times, and today (January 9), bullion prices have shot up again to $1,878 an ounce. (In UAE gold rate terms, the price is up by nearly Dh4 a gram for 22K since January 5.)

This being the case, it is felt that gold loans can be a less expensive option against the other options UAE SME owners/individuals have, especially when interest rates are likely to see more increases starting next month. It also allows them to make better use of the gold assets they are holding rather than wait for an opportune time to sell or trade up.

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So, rather than sell, the option is being given to borrow against the value of the individual’s gold holdings. And once the individual pays back the entire amount, the gold is returned. Until such time, the individual needs to make use of it again.

Pay less as interest

Because there is collateral involved, such gold loans also tend to carry interest rates lower than on credit cards or on personal loans.

“There has been much talk that other lenders are closely watching the gold loan space and whether it would make sense to get in,” said a senior banker. “Currently, there are only one or two big names that offer lending against an individual’s gold holdings. It is a way of creating an additional option – borrow against gold – as compared to only sell earlier.”

Abu Dhabi headquartered Finance House stepped in recently, and offers loans of up to Dh100,000 on a monthly rate of 1.17 per cent. The disbursals take place ‘in less than 24 hours’ and only require ‘simple documentation’ submissions.

Awaiting more players

“Many banks and financial institutions consider offering gold loans as a secured form of credit, with the debtor providing gold as collateral,” said Bal Krishen Rathore, CEO of Dubai-based Century Financial. “Many investors consider gold as a safe haven in times of recession and hence stock up to protect against uncertainty. Other than Finance House, many other financial institutions may enter this space to capture the new source of revenue when interest rates are high.

Emergency situations can strike any time. In such a situation, people often have to rely on loans to meet unexpected expenditures, especially in case of inadequate emergency funds.

- Bal Krishen Rathore of Dubai-based Century Financial

“A lot of households own gold in some form. Demand for gold-backed loans could rise as its global price has reached a two-month high, allowing families to borrow larger amounts against their holdings.

“Additionally, as global economies enter recession, there could be setbacks in the source of income with mass layoffs and business slowdowns already occurring. This would prompt many individuals to take out gold loans since the financial institutions would offer lower rates than credit cards or personal loans on account of the gold collateral provided.”