Lend a little and be good to the UAE economy

Neither a borrower nor a lender be, goes the line from Hamlet, but there are exceptions such as when interest rates are at historical lows and everything is on sale, from houses to household appliances.

That is when, despite best advice of Polonius, it is tempting to visit the bank and seek out a personal loan, as I recently did.

The bank, however, completely ignored my advances and has not been in touch again about my request, not even with an explanation.

Maybe this is good for me and I am not that upset but the bigger problem is for the economy: when times are good, oil prices are high and banks are flush with cash from big government deposits, lenders stumble over each other to lend to individuals, often overextending themselves with the risks they take.

The reverse is unfortunately true when times are tough, oil prices low and the banks don’t have much liquidity at hand: no one is that really keen to lend and everyone becomes risk averse, seeking the safest kind of lending to the most creditworthy companies and institutions.

It’s true that the nascent credit bureau has had some impact on the appetite of banks to lend to individuals now that they are able to see what everyone else has really borrowed at other banks.

But there are I imagine many people like me who have been employed at the same place for several years, don’t do business with more than one bank, don’t have any credit card debt and have perfect scores on their credit bureau test.

Yet still they can’t get a bank to lend them relatively small amounts of money that would taken as a whole give a boost to the local economy.

If this caution was just limited to individuals, it might not be so worrying. But there is plenty of evidence that banks also are also much more cautious when it comes to small businesses, and larger corporations. Every quarter the central bank publishes credit sentiment reports and with each passing quarter the bankers that are surveyed report that they are becoming more hesitant when it comes to lending.

The central bank said in its latest survey in July that UAE banks were less willing to extend loans to corporations and small businesses during the second quarter of the year compared with the first. And this isn’t helped by the fact that many small businesses, corporations and individuals are also extremely cautious taking out debt, it said.

Peter England, the chief executive of RAKBank, the biggest lender to small and medium sized enterprises in the UAE, confirmed this trend two weeks ago when he said that his bank’s loan growth this year will fall sharply to low single digits from the 10 per cent gain last year as not just small businesses but individuals shy away from tapping debt until the outlook for the economy becomes clearer. He did say however that his bank would be trying to boost its share of the mortgage market.

The most productive kind of loan for individuals is a mortgage as it allows individuals to build up equity in homes at a competitive interest rate while giving banks some piece of mind and steady income from a loan less likely to go sour. It is also much less of a headache for banks as the loan is secured by what is typically a stable asset.

Unfortunately, though, because of the downturn in the UAE economy, many people don’t have enough cash for a down payment. In a survey released last week by the property brokerage company Core Savills in Dubai, more than seven in 10 people polled said mortgage caps should be relaxed as it was hindering them from buying homes.

The Central Bank of the UAE introduced a mortgage cap in late 2013, which restricted the loan-to-value ratio for mortgages at 75 per cent for expatriates and 80 per cent for Emiratis for properties costing less than Dh5 million.

Savvy business people know, however, that the best time to invest is when there is most uncertainty. The same is true for individuals and it is a mistake for banks to become overly circumspect when deciding whether or not to give loans.

It may not be quite the Shakespearean tragedy but banks that refuse to “lenders be”, is bad news for the wider economy.


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