From boom to bust

With personal debt in the UAE at a record high, banks are being forced to rethink their loan strategies to recover payments from expatriates badly hit by the credit crunch.

Economic downturns are not bad for everyone. For Calum McClure, a managing partner at Decol Debt Collections, business has never been better. Phones at the Dubai-based agency have been ringing off the hook for the last two months, thanks to lenders eager to sell on loans.

"This is the tip of the iceberg, distressed property sales are already starting to come onto the market," McClure says. "Absolutely [we've seen an increase in our services]; the telephone is red hot."

Decol has tracked a 30 percent increase in business in the last two months, and the firm is not alone. Collectors across the country are reporting a surge in demand as expatriates flee the credit crisis taking hold across the Gulf, leaving their unpaid debts behind them.

Figures released last week by Dubai's Department of Naturalisation & Residency confirmed that 86 percent more residency visas were cancelled in January this year, compared to the same period the previous year. During January 54,684 residency visas were cancelled compared to 29,418 in January 2008.

For the UAE, a country more accustomed to the upward side of the economic curve, this is unchartered territory. The country has had few dealings with the bankruptcies and bad debts that follow financial storms, as demonstrated by the UAE's opaque insolvency legislation. Worse, banks are unsure how to deal with loans racked up by expatriates during boom-time, which are now looking increasingly shaky.

Across the country job losses are mounting as the real estate market flounders. In December, Dubai state-backed developer Nakheel made 500 of its staff redundant. Dubai-based Damac Properties has cut 200 jobs while Al Shafar General Contracting has laid off 1,000 workers.

Outside the property sector redundancies have also been felt with Dubai's Shuaa Capital cutting 21 jobs and Dubai World shedding 100 of its staff.

Many expatriates have since been left high and dry with significant debts.

In recent years the UAE's rapid inflation has outpaced wage growth, while a housing market that typically demands tenants pay a year's rent in advance has forced many residents to take out personal loans.

Last August the central bank said the UAE's personal debt stood at $27bn in 2007; a 64 percent jump on the previous year's figure of $16.2bn. Total bank credit to residents and non-residents in 2007 was $96bn, compared to $67.2bn the previous year. Based on the UAE's most recent census, this would mean every expatriate and citizen owes an average of $6,488.

Personal debt is likely to have climbed still further in 2008 as the credit boom peaked. "One of the differences is [that] the access to credit improved significantly in 2008 compared to previous years," says Raj Madha, banking analyst at EFG-Hermes, the largest Arab investment bank by market value. "The lending criteria probably loosened and the amount of banks that were competing in that space increased."

Banks followed in the footsteps of the global market, handing out cheap money to willing borrowers on the back of low interest rates and the Gulf's booming economy.

"The biggest issue for banks worldwide and locally is the amount of lending which was made against assets and not real money. Locally there has been some element of falling into that trap," says Sean Kelleher, chairman at financial planning and wealth management firm, Financial Partners International.

But the credit bubble burst. As the extent of the fallout became apparent in Q4, banks worldwide scrabbled to tighten their lending criteria. In the UAE, HSBC said it would require customers to earn at least AED20,000 ($5,445) per month to qualify for a personal loan, double the minimum it had previously asked for. Lloyds TSB increased its minimum monthly salary threshold of AED12,000 ($3,267) to AED25,000 ($6,806).

Local banks were quick to tighten terms. On Nov 15 Dubai-based Emirates Bank increased the amount customers must earn in order to get a loan to AED5,000 ($1,361) from AED3,000 ($816), while National Bank of Dubai raised its threshold to AED5,000 ($1,360) from AED2,500 ($680) in October.

In December a government request, issued on the back of a $19bn liquidity injection to bolster the banking sector, instructed local banks to keep loan growth below 10 percent.

These steps, however, have come too late for many debt-laden expatriates. Under current laws, any residents made redundant have just one month to find a new job before their visas are revoked, while bounced cheques constitute a criminal offence. Meanwhile, only a handful of banks offer deferred payment plans for cash-strapped customers, leaving few options open for residents that have lost their jobs.

Steven, a British architect, was made redundant in October - just weeks after he took out a loan to pay for the year's rent. "I went to the bank to reassure them that I could make the first couple of payments while I looked for a job and they said it was fine and to keep them posted. Then the next day they froze my bank account without telling me," he says.

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