Perusing this week the latest central bank credit sentiment report, a survey that gives an indication where demand for debt is coming from, I could not help but notice that while banks have become reluctant to give out business loans, they are having no qualms about increasing the size of their credit card business.
For the banks, this is great. Few products offer them such high returns as these flexible friends of theirs do. At a monthly financing rate of 1.5 per cent this may sound amazingly low, but the longer you hold that debt on your credit card the bigger the amount you need to service becomes. For many holders it becomes like the travails of the Greek figure Sisyphus, condemned to pushing a boulder up a hill, only for it to keep rolling back down on him.
Credit cards are the financial equivalent of weapons of mass destruction for individuals and the problem is they come with no health warning, nor do banks often go out of their way to tell customers that there are cheaper ways to get debt such as a personal loan.
What is curious in the Central Bank credit report is that banks have been less keen in recent quarters to lend to businesses. That is because the amount of cash available for them to dispense (what they call “liquidity”) has shrunk because of fewer deposits coming in and more going out. The past two years have been tough for banks, as the massive drop in the price of oil puts strain on the economies of the Arabian Gulf.
Alex Thursby, the chief executive of National Bank of Abu Dhabi, said in December that UAE banks had lost more than US$15 billion in government deposits after the drop in oil prices prompted many to dip into funds kept for a rainy day.
With less cash available, naturally banks are keen to get the best bang for their buck, because as well as tightening liquidity, the low interest rates of the past seven years or so have meant that the margins from loans that they do get are diminishing. Therefore, seeking out the highest amount of return on the money they have available is sensible.
In its first quarter earnings this week, Emirates NBD said that the amount spent by customers using their cards grew by double digits year-on-year in the first three months of this year.
There is, of course, nothing wrong with using your credit card to fund purchases such as groceries and other routine things if you expect to be able to fully pay it off by the end of the month. Still, research into credit cards has shown that people spend more when they use a credit card rather than a debit card and that chasing loyalty points does the same, effectively wiping out any benefits and leaving consumers with more bills to pay.
If the UAE was a big producer of things such as televisions, watches and all the kind of luxury goods that people usually use credit cards to satisfy their consumption desires, this might have a benefit for the wider economy. But as it stands, the country does not produce much of the expensive stuff that people sometimes buy with credit cards, nor is there a value-added tax on such purchases.
Meanwhile, the banks are becoming less willing to fund the kind of businesses that may have a more beneficial overall impact on the economy.
“Despite the recovery in loan demand, survey results suggested a reduced willingness to extend business loans among financial institutions, with changes in credit standards suggesting a higher degree of risk aversion,” the Central Bank said in its survey.
Many banks are becoming much more particular when it comes to lending to businesses because of a spate of small and medium-sized enterprise business debt that went sour last year, prompting a number of business owners to skip town with an estimated Dh5bn of unpaid debts, according to Abdul Aziz Al Ghurair, the chairman of the UAE Banking Federation.
But it would be a mistake for banks to focus too much on lending to individuals, and especially expanding their credit card portfolio, at the expense of lending to businesses that may bring more benefit to the economy as a whole, such as manufacturing and real estate. The worry is that individuals may become too indebted in a weakening economy and start to default just like SMEs.
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