Dubai skyline
Good news as UAE residents opt for more loans: The ability to take loans means that the economy recovers much faster, experts evaluate Image Credit: Supplied

Dubai: The UAE’s speedy economic recovery is fuelling a positive outlook and higher expectations for loan demand in the months ahead, economists and surveys have been indicating off late. But how is economic recovery related to appetite among residents for borrowing money?

Loan demand rises in the UAE in late 2021

Demand for credit in the UAE is on the rise according to the third quarter Credit Sentiment Survey, a survey of senior credit officers across the banking sector by the Central Bank of UAE (CBUAE).

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The Central Bank survey results showed growth in appetite for credit among UAE residents in the September quarter, which stemmed from increased demand for personal loans across all emirates.

Survey respondents reported that the main drivers of increased demand were the positive turnaround in prospects of the housing market, change in income, financial market outlook, and interest rates.

Looking ahead to the December quarter, survey respondents indicated that they are anticipating further growth in demand for credit from UAE residents.

Central Bank of UAE - CBUAE
Demand for credit in the UAE is on the rise according to the third quarter Credit Sentiment Survey, a survey of senior credit officers across the banking sector by the Central Bank of UAE (CBUAE). Image Credit: WAM

By Emirate, respondents expect a marked increase in consumer appetite and demand for personal loans across the board, predominantly in Northern Emirates and Dubai.

The outlook for the December quarter remains optimistic with survey respondents expecting a strong increase in credit demand and an easing of credit standards by lenders or creditors. Let’s look at what these ‘credit standards’ are.

What are these credit standards imposed by creditors or lenders?
Credit standard is a system used by lenders to gauge the creditworthiness of potential borrowers. It is a system by which lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

The system essentially weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.

But what are these five characteristics? They are categorised under ‘character’, ‘capacity’, ‘capital’, ‘collateral’, and ‘conditions’.

The term ‘character’ in a credit standard implies reference to the applicant's credit history, while ‘capacity’ refers to the applicant's debt-to-income ratio (all your monthly debt payments divided by your monthly income).

The next is ‘capital’, which is the amount of money an applicant has, while ‘collateral’ is an asset that can back or act as security for the loan. ‘Conditions’ refer to the purpose of the loan, the amount involved, and prevailing interest rates.
Explained: How is economic recovery related to appetite among residents for borrowing money?

How will easing of credit standards by lenders or creditors affect your ability to borrow?

When it comes to easing of ‘credit standards’ by lenders, the results of the above survey also pointed to a slight easing of the maximum LTV (loan to value) ratio, when it comes to buying a property. LTV is the maximum amount a lender will consider loaning to you as a percentage of the value of your property.

Also, easing of credit standards by lenders implies a marginal tightening of the maximum LTI (loan to income) ratio or debt-to-income ratio (i.e. all your monthly debt payments divided by your monthly income), and a small increase in fees and charges (tighter financing costs).

But what does this mean to an average borrower? It simply means there is a marginally higher chance that you, as a borrower, can get better terms when getting a property loan. But this would come at slightly stringent conditions to your creditworthiness as a borrower and a marginal uptick in charges.

How growth in loans is indicative of economic growth

UAE’s loan growth has been picking up pace and economists have been widely weighing that this is indicative of the country's healthy financial profile.

Loan growth in the UAE averaged 5.24 per cent from 2009 until 2020, independent statistics show, reaching an all-time high of 10.2 per cent in November of 2014 and a record low of 1.70 per cent in December of 2017.

Bank loans to non-residents accounted for 8.3 per cent of the total loans provided by UAE banks in the in 2020, which is estimated at a mammoth total of about Dh1.8 trillion, according to the apex bank.

How growth in loans is indicative of economic growth

How lending and lenders enable economic growth

Banks fulfil several key functions in the economy – from improving the allocation of capital, by extending credit to facilitate consumption smoothening, through UAE residents saving and borrowing. The creation of economic liquidity lies at the centre of much of a bank’s operations and its role in the economy.

Lenders also improve the process of allocating scarce capital in the economy by extending credit to where it is most productive, as well as allowing households to plan their consumption accordingly, over time by allowing residents or citizens to save and borrow more.

Banks also provide liquidity to the economy as at its core, it is in the business of funding illiquid (not easily convertible to cash) assets – i.e. loans – with highly liquid (easily convertible to cash) liabilities – i.e. deposits. By doing so, banks help savers manage their risk to turn cash liquid (hard cash), while at the same time enabling long-term investment.

Lenders also maintain precautionary savings to meet liquidity needs. There is evidence that banks' liquidity creation is associated with higher economic growth across countries and industries worldwide – as it has been the case for the UAE as well.

How do interest rates assist economic growth?
The world economy has for decades been reliant on central banks to pull itself out of a crisis, and now since the start of the current health crisis, an unprecedented level of economic cash injection (stimulus) was required to keep growth intact, and the central banks worldwide did just that.

As the progress around a vaccine advance, economists see central banks looking to keep interest rates low for now and inject stimulus only if necessary, up until their respective economies, businesses and resident’s finances reach pre-pandemic functionality – and lower rates improve appetite to borrow.
Dubai skyline, Burj Khalifa, Downtown Dubai
Photo of Dubai skyline used for illustrative purposes.

How does borrowing/spending help economic recovery?

When it comes to having cash-at-hand through let’s say loans, studies have shown how in the two decades between 2000 and 2020 – while the rate of savings worldwide have more or less trended downwards with interest rates hitting all-time lows during this time period – the growth rate of borrowing improves.

While reining back spending, cutting back on expenses and holding onto cash is the go-to solution during tough circumstances, it may not be helping when it comes to aiding hopes of a return to normalcy for all. So, what can a saver or a person looking to closely budget do in a situation like this?

Higher savings or opting to get loans from banks mean that consumers have cushions that can help absorb overwhelming expenses without digging the hole deeper.

But just as importantly, having a higher portion of income allocated to savings or to pay back loans mean that living expenses are evened out – and consumers can adjust their budgets.

Bottom line

That ability to take loans means that the economy recovers much faster. After all, when the day-to-day bills are being paid, and loans are taken, the banks, utilities, and stores can keep their doors open – and help the economic growth.

Based on how personal finances affect the economy, as shown above, economists reiterate maintaining a good saving and spending rate as one of the best cures for an economy.