UAE banks are using fees to discourage customers from paying off their loans early, despite efforts by the Gulf state's central bank to slash debt in the country, financial experts said.
Lenders offering cut-price interest rates are reluctant to allow the early payment of loans - a common practice in developed banking markets - as it slashes their profit, said Sam Wani, general manager at Dubai-based financial advisor Independent.
"Lots of banks are offering attractive personal loan products and banks have to subsidise the reduced rates. [They have to] subsidise their loans to make them more attractive," he said.
The UAE Central Bank said in February it would curb excessive lending in a rollout of rules aimed at stopping the practices seen during the oil boom years of 2007-2008.
The central bank capped personal loans at 20 times a borrower's monthly salary and said repayment periods can't exceed 48 months.
Monthly installments for all loans, including personal, car, housing loans and credit cards, must not exceed 50 percent of a customer's gross salary and any regular income, the central bank said.
HSBC, Standard Chartered and RAK Bank all charge customers one percent of the remaining balance of a personal loan to pay it off early, a rule permitted by the UAE Central Bank.
The charge does little to encourage customers to pay off their debts early, said financial experts.
"There isn't any incentive to pay off your loan earlier. The reality is you may as well keep your loan. The banks get paid for the longer you have the loan," said Graham Wolverson, an independent financial advisor at Your Money Matters.
"Clearly it doesn't encourage people to pay back their loans if they are going to be charged a penalty," added Scott Balsdon, senior vice president at financial services firm, Global Eye.
"In the UK, for example, if you go with the major providers there tends to be no early settlement fees for them so you pay the interest going forward and the sooner you pay it off the more beneficial it is."
The global economic downturn exposed the UAE's borrowing excesses, fuelled by easy credit during the country's five-year real estate boom. When Dubai's property bubble burst thousands of expats fled the emirate leaving unpaid credit cards, mortgages and personal loans outstanding.
An Arabian Business poll in July found just nine percent of UAE residents said their banks had been helpful in trying to restructure their personal debts. Some 80 percent reported "threatening calls" from their lenders, or collection agencies, after falling behind with payments.
The survey also showed that more than a quarter of UAE residents had debts of more than $68,119 (AED250,000) - and 20% of residents had no idea of the size of their personal debt.
A number of lenders that claim to allow customers to restructure their personal loans are also turning away borrowers that try to shorten their payment schedule, customers said.