Laws proposed to limit debt

Laws proposed to limit debt
Mahmoud Habboush The National Last Updated: April 23. 2008 3:41AM UAE / April 22. 2008 11:41PM GMT

People using credit cards are getting trapped into a cycle of high-interest payments they had very little hope of escaping. Sammy Dallal / The National
ABU DHABI // The Federal National Council has proposed stringent rules for personal loans to prevent more people falling deep into debt. At a meeting yesterday, officials urged the speedy creation of an independent credit bureau to regulate the multi-billion dirham lending industry.During the session, attended by Obeid al Tayer, the State Minister for Financial Affairs, and Sultan al Suwaidi, the Central Bank Governor, members also recommended a credit reporting system to stop people borrowing more than they can afford to repay.

UAE courts have to settle thousands of debt-related cases despite the overall amount of personal debt in the UAE being a relatively low Dh43 billion (US$16bn). There is also no system to track credit history and assess people’s borrowing capacity. A special FNC committee reported that while banks were required to limit personal loans to Dh250,000, some were lending customers with low salaries more than 55 times their monthly wage.

The institutions also offered them several credit cards with spending limits above Dh50,000, which trapped them in a cycle of high-interest payments they had very little hope of escaping. About 560,000 people borrowed nearly Dh700bn last year, according to the committee. The lawmakers approved a recommendation that banks provide personal loans in proportion to a customer’s salary, and that the amount not exceed 25 times their total income.

Banks were also urged to stop a practice whereby customers were required to sign cheques guaranteeing the amount of their loan. Several lawmakers complained this was a common practice and said many people had been jailed for dishonoured cheques.One of the lawmakers, Yousef al Noaimi, who represents Ras al Khaimah, noted that some banks offered “marriage loans” that were repaid over 14 years.“Is fair to do that to the citizens?” he asked.

The proposals will be forwarded to the Cabinet for approval.Some lawmakers further suggested that the Central Bank was failing to protect ordinary lenders.“The Central Bank hasn’t fulfilled its role as a monitor. I hope the Central Bank will wake up and realise the gravity of the situation,” said Mohammed al Zaabi, a lawmaker from Sharjah. “We need transparency. Personal loans have become a rolling snowball.”
Another member, Dr Abdullah Shaheen, from Ras al Khaimah, said the Central Bank had been “inactive” and was being too lax on banks that helped customers to circumvent the rules to borrow amounts exceeding their means.“The Government needs to decree a political decision to control loaning policies. People have become portable banks with salaries not exceeding Dh3,000,” he said.Mr Suwaidi responded that the Central Bank was working with banks to limit extravagant personal loans. He said car loans should not exceed Dh150,000 dirhams and not be more than 80 per cent of the value of the vehicle.

The Central Bank chief added that the institution was working on new regulations for property loans. “We’ve been improving our control apparatus along with the increasing population and international developments in the field,” he said, noting that the Central Bank last month launched a programme to train some 80 Emiratis in auditing standards to be part of loan monitoring teams. Mr Suwaidi added that about three-quarters of 33,000 debt-related cases handled by the courts last year were disputes between landlords and tenants. A significant amount involved disputes between businessmen or bounced checks, while only seven per cent cases related to banks.

“Bank disputes only constitute 5,710 [of the cases] and they barely end by jailing people,” he said.Mr Tayer also said the Government was drafting a law to regulate real estate loans. He rejected suggestions that the Government pass a law prohibiting lenders from guaranteeing loans with salaries. The minister said that would prevent too many people whose only guarantees were their salaries from obtaining small business loans. “We shouldn’t prevent this layer of society from benefiting from loans,” he said.

The FNC committee also recommended the establishment of specialised courts to examine cases of Emiratis unable to pay their bank loans, as well as the establishment of a government fund in co-operation with charities to help people with heavy debts.

mhabboush@thenational.ae