By Damian Reilly
For anyone moving to the Gulf up until recently, the superabundant nature of credit was immediately apparent.
For anyone moving to the Gulf up until recently, the superabundant nature of credit on offer from myriad banks was immediately apparent.
Lupine salesmen roamed the streets and offices of Dubai and Abu Dhabi, making offers of massive loans, available almost instantly, with reputable banks.
Early last year Insight was accosted unsolicited by a chancer in a suit in a lift, and offered two hundred thousand dirhams on the spot. He represented a well known bank. UAE resident's phones buzzed constantly with unwanted text messages from many banks, offering huge sums of cash on loan. Those of us who took loans when we arrived - and that is the vast majority of expatriate white collar workers - were amazed by the lack of credit checks carried out.
All that was needed was for the borrower's employer to be on a list of approved companies. In many cases, people on monthly salaries of AED16,000 could get their hands on up to AED250,000, in just three days. For those of us from Europe or America, certainly, where obtaining a bank loan could be a laborious and futile experience, the UAE's credit system was eye-opening, to say the least. And the loans were needed. Setting up here is an expensive business.
Lack of public transport means a car is virtually a necessity. Landlords demand rent often in quarterly installments, up front. Furniture needs to be bought. Education for children is very expensive.
But how fast things change. This week, HSBC announced they will no longer give loans to people earning less than AED20,000 ($5,500) a month. Other banks are expected to follow suit. The banks said the move "will ensure that customers receive loans that they can afford to repay at a time of considerable uncertainty around the world." Analysts say they expect other banks to follow suit very shortly.
One wonders, should they do so, what the effect will be upon inflation in the region. The UAE relies heavily upon expatriate middle-income workers. But what is middle income now?
Small, medium and large companies will now be forced, should the AED20,000 threshold be widely adopted, to pay employees a minimum of AED20,000 a month. Without this salary, and the credit it would make accessible, many people would be unable to afford to exist in the UAE.
But where are companies meant to be able to find the means to pay their staff this base rate? Surely, the effect will be to see companies having to ramp up the cost of the goods or services they provide, thereby to recoup costs. This could have considerable ramifications for the UAE's inflation rate.
The dirham, of course, is pegged to the dollar. Economic checks on inflation, such as interest rates, are accordingly set by the Federal Reserve in the United States. Recently, the Fed has been cutting interest rates in a desperate effort to keep capital flowing.
Last year, the UAE Central Bank attributed high inflation in the region to the cost of rent and the cost of buying property. Now that the property market is slowing so dramatically, one might have expected inflation to fall off with it.
The buying market is widely believed to be in stasis - and some banks have accordingly started to refuse mortgages to prospective buyers of property in Dubai. However, increasing so dramatically the threshold for taking a loan, particularly with interest rates so low, could create fresh impetus for high inflation rates.
Surely one option UAE policy makers could consider would be making the payment of rent a monthly concern, rather than quarterly or bi-annual, by law.
Doing so would at a stroke wipe out a great deal of the borrowing pressure expatriates find themselves under, and consequently reduce the pressure on banks to lend. Stories of middle income workers taking loans, repayable over three years, to cover one year's rent are now not uncommon here. This must be an unhealthy state of affairs.
That said, pressure on rents is still very high. $2000 a month does not go far in either Dubai or Abu Dhabi. It will be interesting to watch how rents hold up while property prices tumble.
Certainly, the property market in Dubai is now facing its sternest test. Figures released this week show that villa prices in Dubai fell by 19 percent in September. One fears the figures will be considerably worse for October and November.
Prices for property in the Burj Dubai are said to have halved. The chorus of property market players who were so vocal in their outrage in August, when Morgan Stanley published a report stating the outlook for the market was weak, has grown conspicuously silent. But perhaps they now have more pressing and immediate concerns to attend to: the UAE's largest bank has just ceased extending credit to anyone working in the construction industry. Perhaps the game is up.
Damian Reilly is the editor of Arabian Insight.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.