Banks in credit risk warning

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MONEY WORRIES: Warning goes out to banks as people flee the UAE to escape debt. (Getty Images)

Analysts have warned that UAE banks risk becoming overexposed to bad debt and defaulted loans, due to people fleeing the region to escape debt, and the lack of a federal credit bureau.

According to the UAE Central Bank, consumer loans have soared more than 55% 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 US$13.18bn to the end of March 2008, compared with US$8.51bn in December 2006.

“There are no controls and huge opportunities for fraud or bad loans,” said Deepak Tolani, senior associate, equity research, at UAE investment bank Al Mal Capital.

“Over 80% of the UAE population is expatriate, who could just get up and leave,” he continued. “The banks are on their own in the UAE - they don’t share credit information and there is no credit bureau, so I can go get a credit card of 15 times my salary, then go to the next bank and get another one.”

The number of UAE residents fleeing the country to escape debt is on the rise, according to experts. The phenomenon, known in banking circles as ‘skipping’, has already led to some Gulf Central Banks tightening their consumer lending rules and risk weightings, in a bid to curb debt accumulation.

Analysts also warned that 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,” warned Raj Madha, senior research analyst at EFG-Hermes in Dubai.

“It is difficult to see what that might be, but perhaps political or regional instability, or - less dramatically – a reduced welcome for the kind of immigrants who also invest capital in the country,” he added. “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.”

RELATED LINK: Risks in retail banking

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Fraud
Posted by Gavin Harper, London, United Kingdom on 24 July 2008 at 21:42 UAE time


Yes, this must be a growing concern for banks in the UAE, a friend of mine from London worked in Dubai and after a couple of months he took a 250,000Dhs loan from HSBC and is now back in London with no intention to pay it back. The UAE government must stop this practice.

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