By Claire Ferris-Lay
Moves to slash personal debt in Gulf state stymied by loan charges, refusals to restructure debt
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.
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Several customers wanting to restructure loans have been told by their banks they cannot increase their monthly payments to shorten their borrowing period. A Standard Chartered customer was told she would not be able to restructure her car loan in order to pay it off early.
“Someone in personal banking informed me that Standard Chartered does not reschedule loans. If I wanted to pay off my loan in advance, my one and only option is to pay it off in full,” she told Arabian Business.
Standard Chartered in an emailed statement said: “In case the customer wishes to pay his loan over a shorter period of time, the restructuring is studied on a case-by-case basis.”
A customer at Abu Dhabi Islamic Bank told Arabian Business he tried to repay his car loan early but was told he would have to pay the full interest on the amount.
“They had advertised that if you pay the loan early then only they will charge a penalty in the interest portion of the loan. The sales rep….told me that if I want to settle this loan early the penalty will only be on the profit rate and not on the whole loan,” he said.
“Due to some difficulties I want to settle this loan….but I was told the old rule had changed and interest had to paid in full.”
After several complaints the customer was given a discount on the amount owed. ADIB was not immediately available for comment.
HBSC said in an emailed statement it would “be happy to help customers who want to pay off their loans earlier by increasing their monthly installments” but would “first ensure that they can meet their new increased payments”.
Emirates NBD, the UAE’s largest banks by assets, also said it would restructure loan repayments and “such requests are accommodated based on the profile and repayment capacity of the customers”. The lender said it charges a fee of AED250 for rescheduling loans.
Consumers in the GCC owe an estimated $6.6bn in outstanding credit card debt, figures from London-based research and advisory firm Lafferty Group showed in September.
An average of $8,361 is owed on each of the 7.9 million credit cards in the region while GCC lenders have been forced to write off 6.8 percent of the total amount owed, the UK firm said.
Union National Bank charge 4 % to repay early.
Is this allowed by the UAE Central Bank?
I am glad this was finally raised. Referring to the worst hit sector of economy, namely the housing market, Tamweel are chargeing 4% early settlement fees eventhough this is not clearly mentioned in the mortgage agreement clauses. Who do we complain to?
Tamweel charges 5% if one wants to move loan to other bank and 2% if one wants to early settle with own funds. Borrower is in a deadlock as though there are options to refinace the property at better rate we cannot avail due to prepayment penalties.
Irony is that Tamweel themselves are offering new loans at 2 -3% lower than they lend to their old customers. Its like paying AED 30,000 more PA on one million mortgage.
Central bank should come up with regulation capping the fees to 1% as maximum penalty.
i think the bigger problem is discrimination between old and new customers.
as an old customer you are forced to pay a higher interest rate on the mortgage and a new customer can get a loan at a lower rate.
Thank you AB for exposing the problem from residents are suffering since the economic hit in 2008.
Even Islamic Banks charge these fees. It is usually stated in the financing contract. There is a dual purpose:
1. To protect from competition from more efficient institutions.
2. To lock in the profit on the loan by forcing the customer to keep it to maturity.
The Central Bank should step in to ban this practice in order to foster competition among banks and to encourage good debt management by the customers.
That would lead to lower interest rates and would boost the property market and the economy in general.
On the contrary, one who pays early, it should plus point to his credit rating
I believe this is an unfair practise by banks - by both traditional and islamic banks and needs to be looked into and curtailed.
The main disadvantage is for mortgage owners who had financed during the boom period where interest rates were at their highest. Some properties were refinanced during those years, while at present times the loan outstanding may even be more than the current market value.
The loan rates offered to new borrowers are almost half (if not more) of what is being charged to existing clients. Should clients wish request for a option to amend their agreement to the new scheme or lender, they are either denied or asked to pay the early repayment fee, which 1. on a property loan is quite a large amount 2. needs to be provided upfront and 3. given the fluctuation in market prices and loan to asset valuation - may not guarantee the borrower the same loan amount.
Yes, we can all sit back and claim that these borrowers were greedy, but what about the genuine cases ?
If people knew about these fees before hand, I see no reason to intervene.
Without knowing the specific terms of a contract is hard to judge, and I am not stating that this is the case for anyone, but if you get a fixed rate loan and you are allowed to cancel it when a new (cheaper) offer arrives is getting effectively a very nice deal, variable rates when rates go down, no downside when interest go up. It makes sense for the banks to protect themselves.
If the complain is about this, I seriously see no reason to complain. If there are other issues, like one-sided changes to T&C, or variable rates that never get applied downwards, that is a different question that the article does not cover.
It is not a contractual issue. The banks are operating legally. They simply collude to insert onerous clauses in the contract and the borrower has no choice but to agree - take it or leave it.
It is a question of the market regulator stepping in to prevent such abuses and to enforce best practice.