Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Arabia and the UAE handle bad debts differently, yet both come to the same wrong conclusion

Consumer finance has been on the rise in Gulf countries over the past decade.  Banks have been too eager to give out auto loans, unsecured loans, credit cards and other forms of credit.  This has been a good source of income for banks.  Since the financial crisis, banks have been refocusing on expanding their consumer finance business as they look to reduce their dependence on governments for business (see older post).


With interest rates so low (a typical savings account pays 0.5% per year), consumer loans are still on the high end in the Gulf.  A low annual interest rate on credit cards in the region is 24%, regardless of your credit history with the bank.  Some banks, such as Citibank offer credit cards with annual interest rates as high as 36% (is this legal in any other part of the world?).  Auto loans are on the cheaper side ranging from 4%-9% or above depending on the bank.  Interest rates on personal unsecured loans range from 6% to well above 10% depending on the borrower’s income.  It’s no wonder then that consumer loan defaults have been rising.


Both Saudi Arabia and the United Arab Emirates (UAE) have seen rising bad debts on bank balance sheets over the past few years.  Though their approach to handling these bad loans were different, they both arrived at the same wrong conclusion.  First, here’s a report from Arab News on Saudi Arabia:


About 60,000 Saudis are unable to pay off their loans, said Abdullah Marei bin Mahfouz, chairman of the Jeddah branch of the national committee for the care of prisoners and their families.

Bin Mahfouz said that currently about 300 Saudis are imprisoned in the Kingdom who are unable to settle their bank debts. In addition, about 500 prisoners are unable to pay off credit card debts, and car installments.

Between 2009 and 2011 the increased effectiveness of the payment system — which protects the rights of banks — contributed to lowering the number of people who borrowed money to buy consumer goods, he said.

“I think Saudis are becoming more cautious about getting indebted due to the strict procedures that banks are following. Still, too many Saudis make debts to fund their summer vacation or to buy a luxurious car,” he said.

The bank system is extremely strict in collecting the debts on time. “When the money is not repaid in due time, the bank freezes the account, stops all electronic transactions of the debtor, and then sends them notifications through the police department,” said Bin Mahfouz.

He added, “Most convicts who are in jail because they couldn’t repay, are Saudis. Expatriates are committed to settling their debts. There are a few Filipino debtors in prison. These are locked up because of credit card debts for amounts starting around SR 10,000 ($2,667). In contrast, Saudis debtors in jail run debts from SR 100,000 ($26,667) and more.”

The Saudi Arabian Monetary Agency (SAMA) recently issued a report on consumer debts. It said these reached SR 246.9 billion ($65.8 billion) in the first quarter of 2012. Compared to the same period in the previous year, the number was up by 19 percent.

SAMA had warned banks against rescheduling unpaid debts of individuals, saying that 45 percent of the debts should be repayable within three years.

Saudi Banker Fadhel Albu Ainain told Arab News that the ratio of consumer debts is high; many people are in debt. He expected the ratio to decrease with the entrance of the mortgage law.

In Saudi Arabia the rate of consumer debts, used to buy consumer goods, is estimated at about 75 percent. This is unhealthy for the Saudi market. A healthy market would show that most of the loans are used for acquiring stable commercial investments and real estate. Unfortunately, most of the borrowers are employees whose their salaries can’t cover these loans,” he said. “The problem in Saudi Arabia is that people who earn a low wage often tend to incur debts to live a luxurious life.”

Albu Ainain is opposed to increasing the payment period to more than five years. “Some people are now calling for expanding the debts repayment period to more than five years. There are also calls to increase the maximum amount people can borrow. This is would increase the size of loans and weaken people’s ability to repay their debts,” he said.

You can read the full article on Arab News.


So not only do the laws favor the banks, borrowers who default are thrown in jail.  The solution?  Give borrowers more time to pay the money back and increase the amount they can borrow.


The UAE has taken a different approach to solve this problem.  Here’s a report from Emirates 24/7:


A decision by President HH Sheikh Khalifa bin Zayed Al Nahyan to pay nearly Dh2 billion ($545 million) in debt owed by 6,830 Emiratis to local banks will bolster domestic liquidity and reduce non-performing loans, the Central Bank governor was reported on Thursday as saying.

Sultan bin Nassir al Suwaidi said the decision covers those who are in urgent need for debt settlement but more national debtors would benefit later from a Dh10-billion-fund ($2.72 billion) ordered by Sheikh Khalifa to settle the personal loans of low-income citizens following massive defaults.

There is no doubt this decision will cut allocations by banks for non-performing loans and this will help them boost liquidity…it will also provide additional funds to finance projects,” he told Alittihad newspaper.

“We are optimistic that the main problems associated with personal loans by Emirati citizens will be tackled completely.”

Suwaidi said the initial Dh two-billion ($545 million) settlement ordered by the President would benefit those who have “real debt problems.”

“But the other debtors will also benefit from the Dh10-billion ($2.72 billion) fund ordered by the President in December to settle the debt of low-income citizens…besides tackling their financial problems, the decision will also help family stability.”

Suwaidi said the move would enable the country’s 51 banks to recover debt and this “means fresh liquidity would be injected in the banking sector.”

He said more than half of the indebted Emiratis have obtained loans below Dh500,000 ($136,250), with their total debt standing at nearly Dh28 billion ($7.63 billion), adding that this category accounts for nearly 58 per cent of the total personal debt of about Dh48 billion ($13.1 billion) owed by nationals at the end of October 2011.

You can read the full article on Emirates 24/7.


The UAE’s decision to pay the debts of defaulted borrowers creates a moral hazard.  It solved the symptoms but not the disease, while at the same time, creating an environment for a much larger mess in the future.


From the banks’ perspective, paying off bad debts freed their balance sheets and improved their liquidity.  From the borrowers’ perspective, their debts are paid, they no longer have to struggle to make payments, or worse, spend time in jail.  However, banks now feel more confident than ever in lending to less than able Emirati borrowers because the precedent has been set; if borrowers default, the government will come in and pay their debts again.  This is already happening.  Banks in the UAE are aggressively targeting new consumer loan growth and in some cases have raised their lending limits to individuals.


As you can see, Saudi Arabia and the UAE took different approaches to dealing with bad consumer debts.  Both, however, resulted in the same outcome; solve bad debt with more debt so consumers can continue to living in a lifestyle they can’t afford.  The end result will be an even larger bad debt problem down the road.