Sept 23---debt and you

The debt crisis can be taken all the way down to the personal level here in Dubai. This year alone 82 people have taken their lives because they see no way out!

http://www.thenational.ae/article/20080901/OPINION/423966882/1006/rss

The pitfalls of personal debt

• Last Updated: September 01. 2008 9:07PM UAE / GMT

The casual observer could be forgiven for thinking that the UAE’s 24 per cent increase in personal loans during the first half of 2008, which The National reported yesterday, smacks of profligate living in the face of rapidly rising prices.

And they might be right. According to a study by the Dubai Central Jail, more than 40 per cent of inmates were locked up for defaulting on loans. But what looks like an irresponsible, sudden spike in indebtedness only tells half the story. The lending rates for most Gulf currencies, which remain closely linked to the US dollar, are remarkably low compared to high inflation, which rose about 11 per cent last year. The result is that the real cost of borrowing money, thanks to the low interest rates set by the US Federal Reserve, America’s central bank, is actually negative when inflation is considered.

In that sense, the rising consumer debt is natural behaviour in an environment where money can be borrowed for free. And despite accelerating rates of indebtedness, borrowing levels in the UAE are still manageably low. The economic reality is that the sky is not falling – debt is simply not something to be afraid of. The UAE is entering a more leveraged phase in its economic growth as consumers learn to take advantage of high monetary liquidity to consume while also putting their savings to work.

This is good for consumers, good for banks and (of course) good for the real estate market. But such conditions are not without potential pitfalls. Instead of worrying about rising debt, perhaps it is time to read the economic tea leaves in search of a different message. As the UAE’s economy becomes more leveraged, it’s more important than ever to make sure that the proper safeguards and regulations are evenly applied and obeyed.

The monetary authority has recently dropped the Dh250,000 personal lending limit in favour of a cap that would limit borrowers to 25 times their monthly salaries. But without a federal credit bureau, such a regulation is all but toothless. Borrowers can, for example, use the same piece of property as collateral on several different loans at several different banks.

Irresponsible consumers can also take advantage of the legal lacunae between federal and emirate-level banking regulations. Without a national set of regulations, such borrowers will always be able to find banks with low lending standards somewhere in the UAE. As far as consumers are concerned, bad debt is only part of the problem. Bad – or absent – regulations are even worse.