"At 199.4 cards per 100 people, the UAE has one of the highest penetration of credit cards anywhere on the planet.” - Lafferty Group report Image Credit: Supplied

While most regular wage earners in the Gulf "cut their coat according to the cloth" and maintain a lifestyle in line with their income level, many residents do "bite-off more than they can chew".

The oil-rich Gulf is a region where people change their cell phones and cars at regular intervals to keep up with the latest gadgets and technology that money can buy.

In the UAE, every resident carries more than two cell phones and nearly two credit cards on average. This probably explains why bankruptcy and personal insolvency are on the rise. And, people are falling into a debt trap by only paying the minimum monthly amount due, as the interest payments rise on their outstanding credit card balance.

But the priorities of the majority of consumers have now shifted. People are borrowing money to meet basic needs, rather than to satisfy the desire for consumer goods or fund a glamorous lifestyle.

Emergency cash requirements of UAE consumers tripled in the last three years, according to a survey by Dunia Finance.

Emergency cash loans rose to 15 per cent this year from 5 per cent in 2008, while home loans have declined to a half during this period — from 20 per cent in 2008 to just 10 per cent in 2008, the survey findings showed.

"Consumers are more cautious now with less being spent on discretionary items and more money being set aside for emergency needs and more money being sent back home as savings or to support extended family members," the findings show.

Purchase decline

Retail spend on clothing, accessories, etc has declined by 11 per cent over the past three years, Dunia's survey of 58,000 borrowers shows.

While education loans remains stable at 20 per cent of the credit portfolio of Dunia, loans for new cars declined from 15 per cent to 10 per cent while the reverse has happened in lending patterns for used cars — they jumped 50 percentage points to 15 per cent this year, up from 10 per cent in 2008.

"Consumer borrowing has shifted more and more towards basic critical needs. There has been a sharp increase in emergency cash loans as consumers try to meet sudden events owing to the global financial crisis," Rajeev Kakar, Executive Director and Chief Executive of Dunia Finance, told Gulf News.

"The increase in used car loans also indicates consumer preferences to be more prudent at this stage and opt for lower cost options due to the uncertainty that exists."

Consumer perceptions of the economic outlook are very uncertain, which has an impact on consumer confidence and their appetite for long-term borrowing. Lower consumer confidence levels owing to factors such as job uncertainty, macro stress and economic downturns makes revolving facilities which can be paid back in a flexible manner much more preferred over long term borrowing for a prolonged period of time, the Dunia survey shows.

"Most financial institutions have stopped long-term lending due to the increased risks involved. This can be evidenced clearly in the sharp decline of home loans over the past three years and the trend shifting now more towards flexible facilities such as credit card, revolving loans, overdraft facilities, etc.," Kakar says.

Every UAE resident holds around two credit cards, on an average, according to data provided by the UK-based research and advisory firm Lafferty Group.

"At 199.4 cards per 100 people, the UAE has one of the highest penetration of credit cards anywhere on the planet," Lafferty Group, said in a recent report.

Consumers in the GCC owe an estimated $7.7 billion (Dh28.27billion) in outstanding credit card debt, according to new figures from Lafferty. An average of $1,135 is owed on each of the 6.8 million credit cards in the region.

However, this is miniscule compared to their total debt exposure. GCC consumers owe an estimated $139 billion in outstanding personal debt, Lafferty data shows.

"Unlike the rest of the world, the UAE went through an extended period of crisis — first with the global crisis, following by the Dubai crisis. The UAE, with a predominantly fragmented expatriate population, is still in early stages of customer sophistication and institutional framework," Kakar says.

"There is a high dependency on the West, especially for adopting best in class banking practices. Many customers remain under-served in UAE and are largely ignored."

Personal loans

Personal loans disbursed by UAE banks in May this year reached Dh64.71 billion, according to the UAE Central Bank, whereas personal loans disbursed for business purposes reached Dh180.95 billion.

The level of outstanding debt has risen by 80 per cent between 2002 and 2010, the research shows.

"Given that the population is predominantly an expatriate one, with the core objective of saving and sending money back home, we see consumers behaving in a much more cautious manner," Kakar says.

"They have become more discerning and more demanding in terms of being treated fairly and getting superior levels of service from their financial providers."

However, responsible lending could help the consumers and lending institutions and create a win-win situation for both.

Saudi Arabia accounts for $48.5 billion of the outstanding consumer credit, which includes money owed on mortgages, personal loans and credit cards.

At 52 per cent, Saudi Arabian youth were the most indebted in the Middle East. Two thirds of Saudi respondents' debt was due to credit cards, a survey shows. In the UAE, 23 per cent admitted to having personal debt. Bank loans accounted for 38 per cent of the debts, followed by credit cards (32 per cent) and student loans (15 per cent).

"Following contraction in the number of credit cards and billed volume during 2009, the UAE market registered slight growth during 2010.

However, credit card receivables continued to decline during 2010," World Cards Intelligence said in a report.

Since the onset of the financial crisis, card issuers have made eligibility criteria for obtaining credit cards stricter and lowered credit limits on credit cards. Furthermore, issuers have allocated liberal provisions to write-off large amounts of defaulting loans.

"As a result of the removal of many of these debts the loss rate has considerably reduced in 2010, and is forecast to continue falling in 2011 and 2012. However, tougher credit policies have also led to a considerable decline in rollover rates in the UAE, and will significantly reduce revenues generated from interest," it said.

Furthermore the growth rates in credit cards businesses will be much lower than those leading up to the 2008 financial crisis, the report said.

Another report last year revealed that around 85 per cent of UAE residents were in debt, of which 75 per cent are men and 25 per cent women.

In terms of total debt by nationality in UAE, residents from India and Philippines rank the highest followed by Pakistan and South Africa.

Wealth management

A recent report showed that nearly half of the wealthy people want more financial discipline — almost same as those who live on bank loans and credit cards.

The latest report by Barclays Wealth Insights showed that 41 per cent of high networth individuals (HNWIs) wish they had more self-control over their financial behaviour.

Interestingly, the report indicates that a need for increased financial discipline is likely to be felt most by those at the wealthiest end of the scale (£10 million and up), where 45 per cent of respondents wish they had more self-control.

Greg Davies, Head of Behavioural Finance at Barclays Wealth says: "Many people will be surprised to see that wealthy individuals have a desire for greater financial discipline, however with increased wealth comes an increased complexity of investment decisions. The key thing that investors need to consider is how these decisions might fit in with their overall investment strategy, and importantly, how they fit in with their individual requirements, both financial and emotional."

This is despite the report showing that those who want self-control are less likely to be satisfied with their financial situation. It reveals an interesting pitfall on the theme of "emotional trading", which can tempt one to buy high and to sell low, which can cost investors nearly 20 per cent in lost returns over a 10-year period. Limitations of self-control lead to what the report identifies as the trading paradox.

Soha Nashaat, CEO of Barclays Wealth, Middle East and North Africa says: "When it comes to financial discipline, there is a desire for greater control when compared with other markets. Clearly, more needs to be done to help clients understand their financial personality and the benefits of using financial self-control strategies."

Demand for credit cards on the rise

How do consumer credit trends compare with those of the United States?

During the second quarter of 2011, more consumers opened card accounts than closed them, and they had bigger credit limits to charge with, too, says the Federal Reserve Bank's Quarterly Report on Household Debt and Credit.

The number of credit card accounts jumped by 10 million, to 389 million, between April 1 and June 30. In addition, aggregate credit limits went up by $60 billion. In 2010, the US census bureau is reporting that US citizens have over $886 billion in credit card debt and that figure is expected to rise to $1.177 trillion this year. The total amount of consumer debt in the US stands at nearly $2.4 trillion, according to Federal Reserve.

Based on the 2010 Census statistics, that works out to nearly $7,800 in debt for every man, woman and child that lives in the US.

Average debt

More specifically, the report states that each cardholder has an average credit card debt of $5,100 and this number is projected to reach $6,500 by the end of the year.

The number of cardholders in the US was expected to reach 181 million by the end of 2010. They own approximately 1.5 billion cards, an average of nearly nine credit cards issued per credit cardholder.
In numbers

  • Dh64.71b personal loans disbursed by UAE banks in May this year 
  • $7.7b value of outstanding credit card debt by consumers in the GCC last year 
  • 52% of Saudi Arabian youth in debt 
  • $139b personal debt owed to the banks by GCC consumers last year 
  • $886b credit card debt held by US citizens last year