House of cards

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Meanwhile the banks continue to reap record profits on their ever-growing lending books, having reduced their exposure to Gulf stock market investments in the wake of the 2006 regional crash.

Emirates NBD customer loans grew 42 percent to $50.8bn in the second-quarter, compared to a year earlier.

"As the economy continues to expand along with the population, the growth [in consumer loans] is there and will continue to be there," says Rick Pudner, CEO of Emirates NBD.

Last week the bank opened Emirates Money, its new consumer finance company, to further expand its local lending.

"We're not just throwing money out the door and we are looking at the capabilities of our customers, and the ability to repay the loans," insists Pudner. "We have a very prudent view on the debt capacity of individuals."

Second-quarter earnings from Gulf banks reveal the extent to which debt is growing across the region. Doha Bank, Qatar's third-biggest lender by assets, last week reported a 28 percent rise in second-quarter profit, helped by loans and advances that grew 41 percent to $6.4bn.

In Saudi Arabia, Riyad Bank posted a 44 percent year-on-year rise in consumer loans in the second quarter.

Banks earn an average $95 per year on each card they issue in Saudi Arabia , according to Lafferty.

National Bank of Kuwait CEO Ibrahim Dabdoub has warned that Gulf banks lack adequate risk management skills and resources as they are "too bottom line-oriented" and predicted credit problems emerging among regional lenders.

"If you eat too much, you have indigestion," he was quoted as saying.

As the number of expatriates coming to live in the Gulf increases, so too does the number of people like Jenny Doherty who are considering fleeing to their home countries to escape the burden of debt - known as ‘skips' by local bankers.

"The banks are losing money through ‘skips' - people who just decide they've had enough of Dubai, they borrow up to the maximum and then they disappear," says Dommett at John Charcol.

"A typical scenario would be someone who comes in, takes out a new loan or tops up an existing loan, takes out multiple credit cards, maxes them out buying jewellery and reselling it or taking cash advances, and then leaves the country," Dommett continues.

"Sometimes they'll leave enough money in their account to settle two or three months of debt repayments, but when the money runs out of course they have a two or three month head start on the banks, and the trail is very cold."

The Kuwait Central Bank has toughened consumer lending rules and risk weightings already this year, ordering local banks to cut consumer loans to 30 percent of a borrower's monthly salary from 50 percent, as it seeks to curb debt accumulation.

Just last month Kuwait's parliament voted to increase to $1.99bn a state fund designed to help citizens settle personal debts. The fund - bankrolled to the tune of $1.13bn in December last year - was created to appease MPs demanding the government buy banks' consumer loans portfolios, estimated at around $15bn, to secure write-offs.

In the UAE the Central Bank is monitoring lending activity by all banks, to prevent a crisis similar to that which engulfed the country's banking sector in the mid-1990s.

"We have not seen any deterioration in our loans repayment but we are concerned about it and we are watching it carefully," admits Chris de Bruin, head of consumer banking at Standard Chartered in Dubai. "Repayments are not falling, but we are aware of the inflation and the bank has a general concern in this area."

Back in the 1990s, low reserves and an absence of strict lending legislation threw the banks into chaos after many debtors failed to pay back loans following a sharp business downturn that followed the initial oil boom - a scenario some fear could be replicated today.

"Over 80% of the UAE population is expatriate, who could just get up and leave," warns Tolani at Al Mal Capital.

"The banks are on their own in the UAE, as they don't share credit information and there is no credit bureau," he continues. "I can go get a credit card of 15 times my salary, then go to the next bank and get another one. There are no controls and huge opportunities for fraud or bad loans."

Currently Bahrain, Kuwait and Saudi Arabia all have credit bureaus operated by private companies, while Qatar's Central Bank is studying the possibility of establishing one.

Oman announced the launch of a credit bureau in January and expects it to begin operations in 2009, while the UAE government is currently studying a draft law for a UAE Federal Credit Information Law.

"Credit bureaus have performed a valuable role in improving the consumers' access to credit and HSBC would clearly support the establishment of a credit bureau in the UAE," says George Lennox, head of credit at HSBC Middle East.

"We would like to be able to monitor the situation as a business community, as we don't have the level of information that we would like and that represents the biggest risk," agrees Madha at EFG-Hermes. "The central bank has highlighted the need for an information bureau, and we would be very keen to see progress on that.

"In the US and Europe, people may have chosen to ignore the risks, but the data was there for everyone to see," he adds. "In some parts of the Gulf, the lack of data means we don't know how far we are from this, and we need to know."

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READERS' COMMENTS

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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