It sure seems like this year is going to be tough for our oil-dependent economy, what with the crude oil prices constantly going down – lower by around 70% in the last 2 years! While the government tries to work out a plan to increase non-oil revenues (did you know that over 60% of the UAE budget is funded by oil revenues?) and spend less on infrastructure, the banks are worried about bad debt from small and medium enterprises (SMEs). Because hey, the borrowers are suffering losses and have no money, so how are they going to pay their bank debts? And if the banks are losing money from these SMEs, how will they have enough money to give loans to you
UAE Economic Condition in 2016
Before we worry too much, let’s take a quick look at the economic condition of the UAE in 2016. Points to remember (for that essay your child might be asked to write for the Economics class):
- The economy is expected to grow at a measly rate of 2.5% in 2016 (in 2015 we had a 4% economic growth) – well, at least the International Monetary Fund seems to think so.
- Lower oil prices means lesser earnings for businesses and the government, especially the oil-driven ones. This will directly impact the people through either job cuts or lower pay. This, in turn, will cut down public spending in general.
- The UAE, however, will only be moderately hit among the GCC countries. This is because of the financial buffers already in place in the country and the smaller fiscal deficit expected. Also, the UAE has succeeded in diversifying their revenue sources better than some of the other oil-dependent GCC economies.
Things may not get too suffocating after all, because thanks to the 2008 economic depression, the banks have been working under much more strict regulations and exercising prudence. So much so that Standard & Poor’s and Moody’s have rated the UAE banks as “stable”. But it still means that this year you may not be able to get a personal loan at the drop of a hat.
So, Will the Banks Give Loans or Not?
Here are some indicators on the changes in lending patterns among banks:
- The UAE Banking Federation had said in November last year that several SME owners were leaving the country to avoid the risk of imprisonment. They left behind a total of Dh5 billion in unsettled debts (!).
- Banks, hit by tightening liquidity and lack of returns from business loans, would be conservative and cautious in their retail lending this year. They may also raise lending rates to make up for the losses.
- The three-month Emirates Interbank Offered Rate, a yardstick for lending rates, has risen more than 50% over the past 12 months to 1.03443%.
- Lending by banks is expected to slow to 4% or 5% in 2016, from around 8% in 2015.
Now, let us look at consumer behaviour that will also impact loan availability. According to research, the average household debt – from credit cards as well as loans – in the UAE is about Dh 348,000 ($95,000) and a total of $114 billion! This means that fewer people may have the capability to undertake new debt – whether it is credit card debt or personal loans – this year. Even if they apply for new loans, the cautious banks would require more credibility or collateral guarantee from the customers.
3 Ways to Improve Your Chances of Getting a Loan
This does not mean that you cannot get a loan at all. After all, no bank can survive without giving out a few million dirhams in loans every year. So if you really really want a loan, can you do something to improve your chances of getting a loan? Hell, yeah.
Find out Your Credit Rating and Work towards Improving it.
Credit rating is a popular tool for evaluation of the creditworthiness of an individual in many countries of the world. In the UAE, this service was set up in 2010 through the Al Etihad Credit Bureau, which started functioning adequately only by 2014. The credit report will tell you which are your worst debts and where you need to trim some, and it is useful for the banks to determine whether they can trust you to be a good borrower. So apply to Al Etihad for your credit rating and work on improving your numbers.
Stop Splurging and Pay off Your Loans.
Over the next few months, go on an austerity drive for your family if required. Bring down your spending and debts – both credit card dues and other unsecured or secured loans – and close the debts one by one as you save. If you have any surplus amount stashed somewhere, use this to close your debts. Of course, leave a bit safely reserved for personal or medical emergencies.
Use Collateral for Loans – But only if You are sure of Repayment
Putting up a collateral security – such as your house or car – to get a loan is a great way to convince the banker that you are serious about the loan and intend to repay it. But when doing this, remember that if you do not repay your loan, the collateral will be confiscated by the bank.
So Emiratis, buckle your financial belts, keep a tight hold on your wallets, and spend wisely this year. The entire nation could go in debt if each of us aren’t careful, because oil prices are not likely to increase too much in the next year or two. And we don’t want the UAE to be in debt, do we?