New unified banking rules in UAE take effect from Sunday

Dubai - 29 April 2011: Starting Sunday, bank customers cannot obtain car and personal loans exceeding 20 times their monthly salary and only those with an annual salary of Dh60,000 or more will be considered for a credit card following the new Central Bank regulations meant to protect customers from borrowing beyond their means.

"This is the beauty of this regulation. It protects consumer rights so borrowers don't load themselves with extra loans that they can't repay - unless they have another income and can prove it," said Jasem Al Beloushi, Head of Retail Banking at Sharjah Islamic Bank (SIB).

However, banks are still unable to confirm if customers have taken loans at other institutions without declaring them, bankers and industry experts say.

The regulations provide customers with clear and consistent information on bank fees, which have now been fixed across all banks, Al Beloushi said.

"Now fees are uniform and reduced. Consumers know their salary, how much they can borrow and can plan accordingly. It's not just by trying their luck at different banks."

This should lead to more transparency between banks and customers, he added.

Uniform bank fees and charges will force banks to compete based on better service to attract and retain customers, bankers say.

"This will level the playing ground for everybody so banks will be depending on the quality of services they provide. Customers will be comparing service quality because charges will be the same for everybody," said a senior banker at SIB.

While the regulations are considered "progressive" steps to ensure customers' earning and repayment abilities are linked, they may not be enough.

"The question is whether or not banks can immediately know if someone has borrowed at another bank... are banks actively sharing that data? That's a huge issue. It's an example of ambiguity," said Salman Jaffery, Head of Mena Retail Banking at Ernst and Young.

There is no central bank-endorsed credit bureau to gather information on customer debt that banks can use to check if clients have exceeded the new loan capacity, said Sanjoy Sen, consumer bank head for Mena Citibank, adding that there is no informal arrangement between banks to check customer credit backgrounds.

Typically customers qualify for a loan from the bank to which their salary is paid, but that is not always the case, he said.

A Central Bank-backed credit agency is necessary for the regulations to be effective, bankers said.

In the long term, the regulations may mean fewer bounced cheques and fewer provisions for bad debts as far as banks are concerned, said Al Beloushi.

Interest rates may also be affected, analysts and bankers say. "There will be less lending, our work will be less, and it has its limitations for us. Interest rate may drop," Al Beloushi said, adding that the growth of retail banking will be affected.

But the scale of retail banking regulations, limited mainly to personal loans and bank fees, may not be large enough to impact interest rates, said Jaffery.

The move by the Central Bank is intended to encourage more responsible borrowing, experts agreed.

This means banks can nurture an entire generation of youth who, free from debts they cannot repay, can mature into borrowers of long-term loans for cars and housing, said Jaffery.

This cultivates a future generation of customers who are profitable to the bank, he added.

Source: GN