Whether saving money for a new car, a child’s education, or providing for unexpected expenses and emergencies, it is essential to start saving early. Putting extra cash into a savings account, where funds are secure and can earn interest, is a popular way to take control of personal finances.
Different products in the market are designed to suit individual
requirements. GN Focus looks at the advantages and disadvantages of savings accounts.
Sector expansion
Banks and financial institutions have launched campaigns to encourage residents to open savings accounts in the UAE. Industry experts believe a combination of factors — a hangover from the financial crisis as well as new government initiatives — will see the sector expand considerably.
“With the recent initiatives taken by the Central Bank to digitise payments, you will see a migration from cheques and cash to debit cards, online transfers as well as other electronic modes of payment, and as a result, a behavioural shift from current accounts
to savings accounts,” says Shehzad Hameed, Head of Retail Products, Middle East, North Africa and Pakistan, Standard Chartered. “This will allow customers to earn some returns on their payroll and cash balances.”
After the economic crisis, people began to realise the value of setting money aside to deal with unforeseen situations, says Ambareen Musa, Founder and CEO, Souqalmal.com, a comparison website specialised in financial products. The website has seen a 30 per cent increase in savings accounts searches in the UAE from September to October.
The purpose
Savings accounts allow customers to save money separately from their current or day-to-day transaction account. Hameed says savings accounts are used for the purpose of depositing money and earning a nominal rate of return, whereas current accounts are typically non-interest bearing and used for frequent transactions.
Although interest rates in the UAE, at a maximum of 2 per cent on higher balances, are low when compared to India, for example — where rates for non-resident accounts can be 8-10 per cent — consumers benefit from savings in the Gulf nation because they have ready access to their money.
“At times, rates may be higher in an expatriate’s home country on savings, but the risk of currency
devaluation may offset a large part of the benefit,” says Hameed.
“Also, for some customers, timely accessibility is important when it comes to personal savings and hence people may prefer placing funds locally.”
“Banks, too, recognise that savings
accounts are an important need for customers. In addition, savings accounts provide banks with a stable form of funding. Hence, in order to secure higher saving balances, they typically offer attractive rates and features on
savings accounts.”
Musa says, “During the economic crisis, there was a huge liquidity problem and financial institutions in the UAE pushed their fixed deposit products.
“However, I see this situation has changed now, and banks are back on track and are promoting their savings accounts
with varied schemes to attract customers.”
The present trend is of people moving to the UAE for the long term as opposed to one or two years. As the country offers no social benefits for expats, maintaining good personal savings becomes essential, says Musa.
Also, with the property market seeing growth, a lot of people are looking to buy homes in the UAE. However, with a change in mortgage regulations, there is a need to pay a higher minimum down payment of 25 per cent for expats when buying property for less than Dh5 million, rising to 35 per cent for properties more than Dh5 million.
Account features
Generally speaking, saving accounts are of two kinds: regular
and high-yield accounts, which various financial institutions
brand differently. These come with a range of currency options and features.
Hameed says, “Regular savings accounts offer a nominal interest rate along with greater flexibility in terms of number of transactions that can be carried out in a month. High-yield savings accounts offer a higher rate of interest, but lower flexibility in terms of transactions.”
These accounts will often have a minimum balance requirement of Dh3,000 and if an account holder goes below that level, a charge of Dh25 is applied.
“Banks tend to focus on rewarding high ticket savings balances with high interest rates.
Generally, standard interest rates hover between 0.1 per cent and 0.5 per cent with high-yield savings accounts offering up to 2 per cent on high balances,” Hameed adds. However, there is downside to a savings account, as some banks place restrictions in terms of the number of transactions that can be carried out.
Additionally, no cheque books are issued against savings accounts, which can be inconvenient for the account holder, he says.
Danielle Suchley, Operations Director at Fund Advisers, a financial
consultancy with operations in the UAE, Russia and South Africa, says that savings accounts may offer an introductory rate of 2.25 per cent for the first three months, which can often then drop to as little as 0.75 per cent. One should check whether the attractive interest rates on offer are applicable
for only a limited period.
“Many of my clients make transfers between currencies. Using your local bank to do this can be expensive. The difference between the bid and offer rate — the rate at which the bank buys and sells currency from its client — can be up to 5 per cent.
“This means that anyone [who is] considering large or frequent transfers should look to use a currency platform,” explains Suchley.
