House of cards

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Gulf consumers are spending like there's no tomorrow but profligate lending by banks could be fuelling a regional credit crisis of the future.

When Jenny Doherty first came to Dubai two years ago, she hoped to be able to use her tax-free salary to save for a deposit on a house back in her native Britain. Instead, the 28-year-old PR executive today faces debts amounting to almost $18,000, spread across three credit cards issued by two different banks.

"It's very easy to spend money in Dubai and I had no problem getting credit cards when I came over," she recalls. "I had access to cash well beyond my income and when it's so easy you don't think about how you are going to have to pay it back. You just borrow a bit more."

While Doherty admits she has been irresponsible with her spending, she also blames her bank for lending her money she had little or no chance of paying back. She faces a stark choice: stay and attempt to pay off the loan in instalments - a path which could take her deeper into the red - or flee the country and leave the banks to deal with the bad debt.

"I never thought I'd ever have to run away from something like this, and I would feel wrong doing it," she says. "I'm just not sure that I have much of a choice."

Doherty is not alone in her predicament, as across the Gulf millions of consumers embrace the ‘spend, spend, spend' culture of a region enjoying unprecedented economic prosperity - in marked contrast to the subdued retail sectors of the US and Europe.

"The population is growing so fast, and demand for credit is high," says Deepak Tolani, senior associate, equity research, at UAE investment bank Al Mal Capital. "Banks are borrowing at low rates and lending it much higher because people are prepared to pay."

But as lenders continue to throw cheap cash at their clients in the Gulf, a combination of record price inflation and insufficient regulation means that they could be fuelling the region's very own credit crisis of the future.

"We're moving in the direction of looser credit, and although we've not seen the excesses that we saw in the US [before the credit crunch], who's to say that in two or three years we won't," warns Raj Madha, senior research analyst at EFG-Hermes in Dubai.

UK-based research house Lafferty Group predicts that consumer debt in the Gulf Arab countries could rise to around 60 percent of private consumption in 2008. The group expects the total number of credit cards in Gulf countries to rise 43 percent from 3.76 million at the end of 2006, to 5.38 million cards by the end of this year.

"Traditionally if you have debt somewhere in the world you'd much rather have it in your home country because the amount you pay for debt in your home country has been much less expensive," continues Madha. "Now with US dollar libor coming down and the banks becoming more competitive, it is safe to say that the differential has narrowed."

According to the UAE Central Bank, consumer loans have soared more than 55 percent since the end of 2006, as the second-largest Arab economy has slashed interest rates in line with the US. Loans to individuals rose to $13.18bn to the end of March 2008, compared with $8.51bn in December 2006.

Saudi commercial banks' loans to the private sector increased an annual 33 percent in May, while in the same period Bahraini banks increased their lending to residents by 44 percent from $12.2bn - equating to 76.7 percent of Bahrain's total GDP.

The UAE government last month hit out at irresponsible retail outlets and banks for fuelling runaway consumer spending, warning that the culture of consumerism could seriously dent the country's future economic growth.

"The combination of easy loans in addition to advertising and media propaganda have all combined to plunge consumers into a quagmire of spending spree," said a report published by the Department of Planning and Economy. It revealed consumer spending had surged 122 percent in the last five years.

In Qatar the credit card market has experienced over percent growth in card numbers and 130 percent growth in total spend in the last two years, while outstandings have almost doubled. Growth has been driven by a rapidly expanding customer base and a high inflation rate, resulting in increased customer dependence on credit cards.

"There is a real problem with multiple applications for credit cards, which don't typically require a salary transfer letter," says Chris Dommett, CEO of mortgage advisor John Charcol, and former head of retail credit at Emirates NBD, the largest UAE lender by assets.

"It's very common to see people with as many as eight or nine cards and there's no way of tracking that as they've probably applied for all the cards at the same time," he continues. "Because there is no credit bureau you can't check their credit history or what debts they have outstanding at that level."

Analysts also say any slowdown in the influx of expatriates into the region could trigger a credit squeeze.

"The main thing that could make lending a systemic issue in the UAE and Qatar, is if something happened to slow or stop immigration," warns Madha at EFG-Hermes. "It is difficult to see what that might be, but perhaps political or regional instability, or a reduced welcome for the kind of immigrants who also invest capital in the country.

"If net immigration were to slow sharply, the end user market for property would undershoot, and you might have a very substantial build-up in non-performing loans across the country," he adds.

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Credit Bureau
Posted by Jehan Shanableh, Dubai, United Arab Emirates on Sunday 27 July 2008 at 09:13 UAE time


Dear Andrew White and Amy Glass,

In response of your complaint to the lack of a credit bureau in the UAE, I would like to correct that, as one has been established two years back.

Emcredit was formed in January 2006 as The Emirates Credit Information Company Limited, in accordance with the directives of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai.

As it is incorporated in the Dubai International Financial Centre, Emcredit is fully compliant with international standards of data protection and security.

Emcredit provides enterprise and credit information solutions. We offer identity and data verification, data enrichment, decision support analytics and other tools necessary to improve customer acquisition, servicing, debt collection and portfolio management.

Emcredit helps businesses to make better and thus more profitable decisions at every stage.

Customer targeting:

We provide powerful tools that enable businesses to understand their customers’ needs, their payment behaviour and their risk profiles. Equipped with this information, they can identify the most efficient way to market their offerings to them.

Customer acquisition:

We help to assess customers, automate business decisions, verify identities and detect fraud.

Portfolio management:

We enrich our clients’ own records with valuable data from other sources to build up a more complete picture of their customers. This helps our clients realise the hidden potential of their customer base, increasing the possibilities for growth and customer retention.

Debt management:

As well as improving debt collection, we can help businesses to identify the early warning signs of possible default so that preventative action can be taken.

How we help consumers:

By enabling individuals to review and verify their report details via a secure online portal, Emcredit improves personal financial planning and helps individuals succeed in their plans for the future.

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