By Claire Ferris-Lay
In 2009, hundreds of bank customers were leaving UAE without settling their debts. Has the picture changed now?
We’ve all been there. it gets to the end of the month, the funds in the current account are getting a little low and you turn to the credit card to meet the shortfall; that is after all what credit cards are for.
Is this how consumers in the UAE use their credit cards? Judging from the fact that fifteen percent of respondents to this year’s Arabian Business debt survey admit they have more than AED100,000 ($27,224) outstanding on their credit cards, it might not be the case.
The UAE has one of the world’s highest credit card penetration rates with 199.4 cards per 100 adults in 2008 — the most recent data available. That’s a more than threefold increase from 62 cards per 100 adults in 2003.
The Gulf state’s five-year property boom fuelled borrowing and credit card spending but it wasn’t until the global economic crisis hit that its borrowing excesses were revealed. At the height of the country’s debt crisis in 2009, UAE lenders said they were seeing up to 2,500 customers leave the country every month without settling their debts.
Banks were forced to curb their lending and increase their interest rates in light of the downturn while the UAE Central Bank in February introduced several measures to reduce consumer’s access to credit.
Today, some two years later, the economic outlook for the UAE is very different. The country’s position as a safe haven amid the regional turmoil combined with rising oil prices and increased confidence in the economy is boosting the number of credit cards in circulation and the amount of money that is being spent on plastic.
This is evident in this year’s debt survey. Around 62 percent of those polled say they own between one and three credit cards compared to eight percent with between four and six cards and twelve percent who have more than six credit cards. Eighteen percent say they don’t own any.
The majority of respondents (49 percent) say they have less than AED10,000 outstanding on their credit cards, 26 percent have AED10-15,000 while ten percent say it is AED50-100,000.
This is in spite of the fact that UAE lenders charge some of the highest interest rates for their credit cards in the region. Interest rates range between 2.25-2.99 percent in the UAE compared to 1.6-2 percent in Saudi Arabia, 1.5 percent in Qatar and Kuwait and 1.74-1.83 percent in Bahrain, according to a January study by Al Khaleej.
It’s little wonder that the likes of Visa and MasterCard are ramping up their expansion plans in the region. In April, the electronics payment giant Visa opened its new headquarters in Dubai in a bid to capture a larger slice of the pie.
“The Middle East is one of the fastest growing regions for Visa worldwide, and we continue to invest and build our presence here,” Elizabeth Buse, Visa’s group president for Asia Pacific, Central Europe, Middle East, and Africa said at the official launch.
MasterCard, the world’s second biggest payments process, is also following suit. Last month its general manager told Arabian Business it was seeing double digital growth across the region.
“We’re definitely growing in high double digits, even this year. Our market share seems to be improving in most markets across the Middle East,” said Raghu Malhotra, GM of MasterCard Worldwide Middle East.
“The one thing we have noticed in markets across the Middle East is that they are very resilient. They bounce back very quickly and go back to exactly the same point that they left off,” he added. It certainly looks that way.
This is a dangerous game these both credit facility providers are playing in this region. Most of the cards go into the hands of locals, these individuals have the higher end use of this plastic.
Knowing that the unemployment rate in local community is growing day by day, it has the potential of people becoming defaulters on their payments. So the even if you double your profit margin in this region you are taking just as double the risk of non payments. Then a stream of cases would be raised against the people. So I say be a bit less optimistic about the situational growth and not the permanent growth.
In neighbouring KSA, while telephone & internet banking are as widely used as UAE but even in year 2011 a cheque book & credit card is not in the reach of an expatriate or majority of locals Saudis.
Naturally the debt & interest burden carried by Saudi locals & expats is much lower than that of other GCC states.
One of the biggest reasons of the collapse of economies in general and huge ambitious projects is due to accomodating & relying upon 'interest' generating instruments.
Giving & taking 'interest' is unlawful since 15 centuries.
Remedy: Individuals & institutions should search for ways to give 'interest free loans' with the same frenzy as banks searched for ways to lend.
People at India & China, queue upin great numbers to participate in equity and the impact is clearly showing in their growing economnies.
Credit card debt is so demoralizing, it's so hard to be patient and diligent about paying off my high interest rate credit cards first, and then little by little paying everything off.