Last week, the UAE government warned the Gulf state’s commercial lenders that they were obliged to write off 50 percent of debts owed by citizens or face punitive treatment.
The Debts Settlement Fund, as it is known, was setup in 2012 to assist those Emiratis who found themselves steeped in personal debt when Dubai’s property market collapsed in 2009. It requires banks to waive half of what they are owed by UAE citizens, with the other half settled though an AED10bn ($2.7bn) fund. Those banks that politely decline to take part will be named and shamed by the UAE Central Bank, and potentially be placed on a government blacklist.
So far, close to $500m in personal debt has been settled for 2,700 applicants, or about $185,000 each. There are a further 3,300 applications to go.
From one perspective, the measure makes sense. At about 15 percent, the local population in the UAE is small and it is encouraging that the government wants entrepreneurial Emiratis investing in the domestic economy rather than saddled by crushing debt repayments or sitting in local jails. Furthermore, bankruptcy in the UAE is a complicated beast and present legislation is inadequate. For example, can a foreign bank repossess real estate owned by an Emirati, despite the law stating that land ownership is technically restricted to citizens?
Finally, given the clean break that has been awarded to state-linked entities and developers since the financial crisis, which were by-and-large bailed out and restructured, Emiratis may feel that they too deserve to have the slate wiped clean.
However, the policy is clearly unfair on lenders and expatriates alike. In the latter case, numerous cases saw individuals (many of them property investors or developers) languished in the country’s prisons after defaulting on payments, often through security cheques, following the economic crisis. They will probably feel hard done by. Of course, that is not including those expatriates that just hightailed it out of the UAE altogether to avoid their creditors.
It also worth mentioning that the policy of clearing debt will do little to educate about fiscal responsibility in one of the world’s most promising markets.
The country’s banks will also be displeased, understandably, at being forced to pay through the nose to settle customers’ personal debts in what they will see as no fault of their own. All of this in what was recently ranked as one of the world’s most competitive economies.
Inevitably though, these banks will seek to recoup these costs elsewhere, whether that is through less competitive interest rates or higher fees, meaning in the end, everyone loses.