President His Highness Shaikh Khalifa Bin Zayed Al Nahyan has ordered the settlement of defaulted personal loans of UAE nationals of less than five million dirhams. This includes those in detention, pending trial, convicted or settling their debts through court scheduled instalmentsinstalments. The number of Emiratis covered by the Presidential Decree was 368; their defaulting debts were approximately Dh568 million.
Undoubtedly, the kind gesture of the President has elevated the state of not only those 368 individuals but their families as well. It is a reminder that though the population grows, the capacity to maintain fraternal sense of commune between leadership and people remains very much alive.
The question that presents itself, though, is how did those individuals become indebted in the first place? Is this a failure of personal fiscal responsibility and cultural consumerism? Is it an issue of lax banking regulations? These are questions that need to be answered. Perhaps a socio-economic study could be undertaken wherein the 368 beneficiaries of the debt relief programme would be interviewed and their circumstances and decisions that led to their financial ruin be better understood. This would eventually help shape future policy recommendations in the banking sector.
According to a trusted source, one of the beneficiaries received the news through the bank and was immediately offered a new loan to replace the now paid loan. This is exactly the kind of practice that will ensure that the government will need to issue a similar bail-out again in a few years. Without a change in policy, this cements a mortal moral hazard of irresponsible indebtedness within society.
This wastes crucial funds that could go into development projects with sustainable economic and social returns. It also acts as a counter incentive to those who live according to their income to do as per their debt limit.
This isn’t an issue of 368 individuals who made bad financial decisions. This is about ensuring that the culture of saving and responsible borrowing becomes part of the national ethic.
The government has an opportunity to capitalise on the President’s timely initiative and follow with a set of campaigns, rules and regulations that would ensure that this initiative does not signal a free ticket to irresponsible personal financial management but rather a break from it. Here are some suggestions:
1. A campaign, perhaps jointly between the National Media Council and the Ministry of Cultural Affairs, could be launched to inform the public of the values of saving, and when borrowing is wise and when it is not. The general rule must be that borrowing to fund investment (for example business) is good practice while borrowing to fund expenditure (for instance cars, travels, shopping) is bad practice.
2. A campaign, perhaps jointly between the Ministry of Economy, the Central Bank and the Emirates Society for Consumer Protection, would enforce lenders to display information — and even provide it as part of every application form — produced by the said group on the general sensibilities of responsible borrowing.
3. Perhaps the Central Bank could introduce further limitation on how much banks can lend to individuals with no tangible asset guarantees — i.e. beyond cheques.
4. The Federal Credit Bureau, decreed last year, could play a larger role by ensuring the individuals with bad credit would find it harder to borrow again. This would also serve as a deterrent for individuals without bad credit history to take on irresponsible loans.
5. The much discussed issue of decriminalising personal bankruptcy would force banks to lend more responsibly as it removes that personal freedom pressure card, which has time and again served as an incentive for the debtor’s family and friends to jointly pay off his debt, which in turn has formed the ultimate insurance for personally guaranteed loans.
Government and society have an opportunity to utilise Shaikh Khalifa’s debt relief initiative as a game changer in our attitude towards irresponsible indebtedness. We shouldn’t waste it.
Mishaal Al Gergawi is an Emirati current affairs commentator. You can follow him at www.twitter.com/algergawi