Borrowed time

Three weeks ago I was wondering around the car park outside my office, when I bumped into a young guy in a smart suit. He politely asked me where the closest bank machine was. I showed him.

A few moments later, he reappeared. "Hey man, I meant to ask. Do you have enough cash?"

"Erm, well, I think so," I replied.

"I can get you some. How about two hundred and fifty thousand dirhams? How does that sound? Get yourself some nice clothes, a holiday, maybe a new car? You like the sound of that? I bet you do."

Strange incidents like this are now normal in the UAE. Even the car park is no hideaway from pushy salesmen from UAE banks, desperate to offer just about anyone they can a loan, and pretty big ones at that.

As our cover story this month shows, your credit history, your job security, your current financial status and your general ability to pay back the loan are pretty irrelevant: in the UAE, you want a loan, you got it.

There comes a point in any credit lending heavy society that it all starts to go wrong. Look at Britain, where personal debt is at an all-time high and bankruptcy levels constantly rising. There, as in many other parts of the world, it is far harder to get hold of a loan, or even a credit card for that matter.

But banks in the UAE - from local giants such as Mashreqbank to foreign players such as HSBC - have no such qualms. And why should they? In February this year Mashreqbank reported a staggering 132% rise in profits to US$433m. Even more staggering is the figure of US$7.79bn - the amount Mashreqbank lent to customers last year, a jump of 28%.

Other banks are reporting similar trends: with hugely varying interest rates, heavy penalties for early redemption and endless extra charges, loans are not just big business but the best business.

It is exactly this type of lending spree that has allowed banks such as Mashreqbank, Abu Dhabi Commercial Bank, Citibank and RAK Bank to become major players on the international stage. Their asset base and profit figures are already far more impressive than many long-established banks. But where will all this end?

History shows that no credit boom can last without a bust. In their eagerness to dish out the cash, there is no doubt that many banks are kissing goodbye to some of that cash.

Right now, bad debt accounts for just a few percentage points, but in the next three years, most experts believe that could hit double figures. Which would mean some banks being stuck with US$700m plus of bad debt, suddenly eating into their profits - a situation they have not yet had to face up to.

The future isn't that bright for customers either, many of whom have little idea exactly what kind of loan they have taken out, what the clauses are and what they will end up paying back - assuming they do pay it back. Those that don't face tough penalties including imprisonment.

I fear that the UAE's lending system is now at a crossroads. There has for the past two years been much talk of credit rating agencies, and even new regulation being introduced.

Yet little has happened - aside from the recent setting up of an independent credit bureau.

It's easier than ever to get a loan, and even easier not to pay it back.

And unless something is done soon - as in this year - the debt nightmare of the West may be heading here.

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