UAE Household Debt of $114 bn threatens stability

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UAE household debt
UAE citizens celebrating during the UAE National Day. Total UAE household debt reached $114bn, with debt most prevalent among the youth of the UAE who have become socially class-conscious and feel the need to indulge in luxury purchases to maintain their perceived social staus. (Photo for illustrative purposes only) Photo: Tom Olliver/Flickr

The total UAE household debt was recorded at over USD 114bn in June of 2012, which translates to USD 95,000 of debt per household. These figures are indicative of the rising trend of excessive lending which is increasingly posing a threat to the financial sector in the UAE.

Findings by research firm Strategic Analysis:

Personal debt is becoming an increasing problem in the United Arab Emirates (UAE). Despite the implementation of debt relief by the governing body, large risks are involved with this particularly policy. An eventuality could be the stability of the financial sector being undermined, leading to a negative credit rating. Current statistics show that 60 percent are spending up to a quarter of their monthly income on debt repayment, and a third of all people now owns three or more credit cards.

The trend of household debt has been found to be the most prevalent with youth of the UAE who have become class conscious and feel the need to indulge in luxury purchases to maintain their perceived social status. A poll showed that 60 percent of UAE citizens spend a quarter or more of their monthly income on debt repayment obligations alone, posing a threat to consumption expenditures. Further, 48 percent have monthly loan repayment obligations that exceed their financial ability, eventually resulting in default.

The threat can be gauged from the fact that in 2012, the total dollar amount of ‘bounced cheques’ totalled USD 12.7bn. However, on the bright side, this figure represents a 15.3 percent decline compared to 2011, as a large wave of bad debt followed the 2008 economic crisis.

A factor contributing to the delays in repayment might be the government’s decision to reverse the law of issuing a bounced cheque, for UAE citizens. Until October 2012, issuing a bad cheque was a criminal offense and was penalized by a minimum of 1 month and a maximum of 3 years in prison.

In comparison to other GCC countries, the debt situation within the UAE is particularly alarming. 

Total GCC household debt was estimated at USD 170.8bn last year, meaning that the UAE represents roughly 67 percent of the consumer debt in the GCC. One reason for the disparity is the difference in lending regulations.

Before the economic crisis of 2008, any adult individual could take out a personal loan of up to USD 68,000 and loans for small businesses were routinely approved up to USD 545.000.

The changes in regulations concerning household lending has contributed to the problem at large allowing a large number of entities to default on their debt. In 2012, the percentage of non-performing loans in Dubai peaked at 15-17 percent — which is contrary to the situation in 2011, when the Central Bank introduced more stringent criteria for personal lending; banks were only allowed to issue loans up to 20 times the income of the individual, and repayment of loans has to occur within a period of 48 months.

More importantly, the monthly installments on personal loans may not exceed 50 percent of monthly income. In comparison, in Saudi Arabia loans may not exceed 33 percent of the income of workers or 25 percent of the income of retirees, thus posing stricter limits on personal lending and preventing debt repayment obligations from becoming unmanageable.

Another factor that has contributed to the increased household debt in the UAE is the high interest rate on credit card debt in the UAE, which stands at an average of 37.75 percent. This figure is 20 percent higher than in the UK. This leads to comparatively high credit card debt, as UAE credit card holders often do not immediately pay off their credit card debt, which allows interest to accumulate and debt to substantially increase in a relatively short amount of time.

In the attempts to combat the crisis, the government of UAE can emulate some of the debt relief programmes as are already implemented in other GCC countries. The Kuwaiti parliament recently approved a USD 2.6bn relief scheme for debt for loans issued prior to 2008, the UAE issued USD 2.7bn to clear defaulted debt in 2011.

If excessive lending is not curtailed and households are encouraged to continue borrowing money beyond their means, it will keep the problem intact and likely worsen it.

Government debt relief must be coupled with stricter regulations on household lending, so that excessive lending and defaults can be prevented.

Personal Debt in the UAE- Infographic
Personal Debt in the UAE- Infographic

The positive news is that in general, the banking sector in the UAE and GCC retains a high degree of liquidity. In April 2013, the deposit-to-loans ratio was 1.1 : 1, meaning that UAE banks held more deposits than they had outstanding loans.

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