UAE Central Bank ban on consolidation loans

Abu Dhabi: UAE banks are doing their best to maintain profitability in the wake of a central bank decision meant to limit their ability to transfer loans between banks, according to Amer-Nouman Ashour, a financial adviser and senior financial analyst at CNBC Arabia.

The UAE Central Bank is in talks with the UAE Banks Federation over a ban on banks offering consolidation loans with repayment schedules that extend beyond 48 months for Emiratis. A circular issued by the central bank says that loans must be income-based and shall not exceed 50 per cent of the income of UAE citizens to be paid in a period no more than 48 months. According to the central bank, many clients have been asking banks to purchase their loans in order to reduce their monthly premiums, even though it increases the overall amount they must pay back.

“The central bank had asked banks to regularly report on their activities, deposits and loans ... the central bank noticed that banks only seek speedy profits by any means regardless whether this would harm the economy or would benefit it,” Ashour said.

He added that the extra fees banks charge for services are imposing a further financial burden on clients.

“The central bank seeks a drastic solution to the loans problem with no repercussions. The central bank will for sure in the coming weeks lower interest rates and decrease profit margins, which is why the banks are doing their best to regain momentum in the rescheduling and purchase of loans amongst themselves,” Ashour said.

However, bankers say that the central bank move is likely to go against customers. “The central bank’s decision will limit the options of customers and will negatively affect the economy,” the bank federation said in a statement.

Abdul Aziz Abdullah Al Ghurair, chairman of the UAE Banks Federation, said that allowing customers to move their loans between banks allows them to benefit from a lower interest rate.

“We wanted a solution that yields benefits to borrowers. We seek a solution that gives them the right to transfer loans from one bank to the other so that they can benefit from competitive interest rates that would reduce their burdens and facilitate their payments,” he said.

The Federation has formed a specialised committee to prepare a code of conduct of for the banking sector. It would allow customers to know their rights and raise the level of financial literacy.

“Our continuous cooperation with the central bank aims primarily to find the best solutions to reduce the loans burden on UAE national borrowers, and it is the banks responsibility to provide the best services at a high level of transparency, and find further solutions and the best interest rates to reduce national borrowers’ loans. It is the customers’ right today to gain from the current interest rates on personal loans, 2.8 per cent in some banks, due to the strong competition which falls on the customer side,” Al Ghurair said.

Mohammad Al Asoomi, a UAE based economist, told Gulf News earlier that banks in the UAE have high capital adequacy levels to help them cover the loans in case of default, and the Central Bank’s decision will perplex the market mechanism.

“The Central Bank had recently issued some contradictory circulars which reflect unclear vision of how to deal with loans,” Al Asoomi said.