By Beatrice Thomas
Local households now have average debt of twice their yearly income, says business academic
The UAE’s consumer debt-to-income ratio is higher than in most European countries and the US, a business academic has said.
London Business School professor of finance Francisco Gomes, who lectures in the school’s Dubai-based MBA programme, also said regulators needed to set clear rules for lending institutions.
Research released by Strategic Analysis last month showed consumer debt in the UAE had reached $95,000 per household, or $114bn in total.
It followed a study by local price comparison website Compareit4me.com, which found more than a third of UAE respondents to a new survey had more than three credit cards, while half had nearly maxed out their limits and 42 percent did not pay more than the minimum repayment each month.
Professor Gomes said the $95,000 debt level compared to an average household income of around $45,000-50,000.
“This implies an average ratio of household debt to income of almost 200 percent,” he told Arabian Business.
By comparison, he said, the average ratio in the Euro area and the US was close to 100 percent.
“In the UK the number is higher, but still just under 140 percent,” the London-based academic added.
“Even in 2007, the value in the US was only 130 percent and in the UK it was 155 percent.”
Professor Gomes said it was important consumers were financially literate, and he advocated personal finance to be taught in schools.
But, there were “fundamental rules” regulators should set to try and minimise the problem.
Professor Gomes said all loans should state upfront a clear and all-inclusive Annual Equivalent Rate, as well as a detailed list of payments, including fees, which were due at each period during the life of the contract.
“For instruments with variable interest rates it is important for regulators to set clear plausible scenarios that the lending institutions must use to provide alternative AERs and payment breakdowns,” he said.
“It should be made clear that these are fairly plausible market conditions and if the consumer is not able to sustain those alternative payments they would probably be better off by not taking the loan.”
Professor Gomes said consumers should also have access to “truly independent financial advice”, while understanding their personal risks.
He said economies with high growth rates and those with higher investment potential could afford higher levels of debt.
“However, in the UAE the data suggests that the high levels of households that are being used to finance increased levels of consumption,” he said.
“Income growth in the UAE has been consistently high, but it has decreased by more than half with the global recession.”