A culture of lending: Consumer borrowing has grown rapidly, creating both opportunities and challenges

While the prudent expansion of lending activity is a fundamental principle of banking strategy, and a key indicator of a healthy economy, concerns over an overheating credit environment in the UAE were raised in 2013 by some industry observers. Of particular interest to the local press was a rapid rise in consumer borrowing, with credit cards and car loans bulking up loan books in early 2013, and the growth in customer borrowing in the early part of the year outstripping the total growth seen in 2012.

Personal Indebtedness

The uptick in retail borrowing also brought a warning from the Abu Dhabi Department of Economic Development (ADDED), concerned by the rising indebtedness of UAE borrowers. Speaking at an event designed to raise awareness about credit-driven spending, ADDED spokesman Jalal Masaabi said that the department would prefer a citizen to be “productive to the economy and not living pay-check by pay-check to pay off their debt”. His concern appeared to be borne out in June 2013, when personal loans to residents for the month increased by some Dh3.8bn ($1.03bn), while the year-to-date rise of Dh15.3bn ($4.2bn) equalled the total amount of new consumer credit extended over the preceding two and a half years. On the one hand, the increased consumer confidence and loan activity was, in part, the result of the high liquidity of the banks in 2012. Christopher Taylor, the CEO of Abu Dhabi Finance, told OBG, “There was resurgence in demand for mortgages in 2013. One of the factors, aside from improved confidence in the housing market, was because banks had built up a lot of liquidity, and in places like Abu Dhabi this often translates into good offers to consumers as lending becomes increasingly affordable.” New rules introduced by the central bank in December 2013, however, could begin to slow demand for mortgages. The bank’s decision to cap mortgages in the UAE at 80% for Emiratis and 75% for expatriates, with second and third home mortgages capped at 65% for Emiratis and 60% for expatriates, are expected to curb speculation and prevent another market crash.

Lending Growth

Judging the line between an overheating personal credit arena and a welcome return of consumer confidence and discretionary spending is challenging, and will doubtless occupy the ADDED and other government bodies for some time to come. However, looking at lending expansion at the emirate level, an examination of recent lending activity at the top five banks reveals what most analysts would concur are relatively modest loan book increases undertaken at a sustainable pace.

According to an OBG analysis of published financial data, the aggregate lending of National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank (ADCB), First Gulf Bank (FGB), Union National Bank (UNB) and Abu Dhabi Islamic Bank (ADIB, the data for which includes its murabaha and ijara financing activity) rose from around Dh495.4bn ($134.8bn) in 2011 to reach Dh541bn ($147.3bn) in 2012, or an increase of about 9.10%. The highest year-on-year percentage increase was posted by First Gulf Bank, which saw its loan book expand by 9.48% to reach Dh114.6bn ($31.2bn), but two of the top five banks showed modest decreases in lending activity for the year: ADCB saw its lending activity contract by 1.25% to settle at Dh123.2bn ($33.5bn), down from the previous year’s Dh124.8bn ($34bn), while UNB posted a 0.41% decrease to finish the year at Dh57.3bn ($15.6bn), down from the Dh57.8bn ($15.73bn) of 2011.

Portfolio Structures

Moreover, the loan portfolios of the banks that have most ardently pursued business in the retail segment have shown little structural change over the past two years. FGB, a more retail-oriented operation than the emirate’s largest two lenders, reported at the close of 2012 that personal loans accounted for 36% of its total loan portfolio, a 1% increase on the previous year, while retail lending by ADIB accounted for 23% of gross loans in 2012, compared to 26% the previous year. Abu Dhabi’s largest lenders, meanwhile, continue to extend the bulk of their credit to the commercial sector. The single largest recipient of NBAD’s lending activity in 2012 was the banking and financial services sector (17% of the lending portfolio), followed by the government (12%), services (12%) and personal loans (9%).

Similarly, retail lending makes a relatively minor contribution to ADCB’s portfolio. Instead, amid an operating environment characterised by customer deleveraging, stringent regulations and intense price competition, the bank has introduced several new services including Mobi, a cash-less, card-less, and phone-less payment mechanism; a credit risk policy; three new branches and 30 ATMs; and a loan management system for multiple lines of businesses.

Given these modest rises in the proportion of retail lending on the balance sheets of the emirate’s most retail-focused banks, and the continuation of the commercial focus of the larger players, it might be argued there is room for more personal loan growth.

Measuring Debt

However, while little data exists concerning personal debt levels in Abu Dhabi, a 2012 survey by the National Family Status Observatory that examined the issue in the wider UAE concluded almost 60% of Emirati families spend around a quarter of their income on servicing credit facilities. In the view of many observers, therefore, the salient question is not one of personal lending expansion rates, but the lack of clarity on the level of existing debt among Abu Dhabi’s population, and the burden that historical debt continues to place on borrowers.

This has also become a concern for lenders. Abu Dhabi’s banks are required by the Central Bank of the UAE (CBU) to take into account a customer’s accumulated liabilities when assessing his or her ability to meet a repayment schedule, but the absence of a government-mandated credit bureau makes this task a difficult one. The availability of credit data for individual customers is, at present, quite limited. Under the current system, banks are obliged to report defaults on loans after a 90-day period, and the “negative list” this creates, held by the CBU, can be crosschecked by other lenders across the UAE.

Banks have also had recourse to the services of Emcredit, a privately owned credit information firm established in 2006. While it has access to sources in the collation of its data, such as government departments and financial institutions, it does not have the regulatory sanction that would oblige banks to share data and verify its accuracy. In the past, the difficulty of ascertaining the extent of a customer’s liabilities has frequently been cited as one of the principal reasons for the higher fees and commissions that characterised the market. This has led to an imperfect risk environment resulting in good, low-risk customers effectively subsidising the higher-risk, more-leveraged borrowers. The possibility of establishing a federal credit bureau to allow for a greater degree of risk-based pricing in the market has therefore been a talking point for some time, and in 2013 some important steps were taken toward realising that goal.

New Bureau

In 2012, the Ministry of Finance established a national credit bureau with a paid-up capital of Dh200m ($54.4m). Owned by the federal government and overseen by the CBU, by June 2013 Al Etihad Credit Bureau succeeded in signing up 12 banks in time for a soft launch in June 2013. In October 2013 the new bureau appointed its first CEO: Marwan Ahmad Lutfi previously served as deputy CEO and managing director of business development at the Dubai International Financial Centre Authority, and has been charged with overseeing the implementation of the bureau’s strategy and the development of its operations. To this end, the bureau has joined forces with the CBU and the UAE Banks Federation, the industry lobby group, to help it carry out its first phase of development, which is based around the collation of consumer data from the 12 participating banks. The second phase of development, according to the current plan, involves the compilation of a database of all commercial companies operating in the country, including joint stock companies, and further developmental phases will see the bureau introduce value-added services for lenders, such as portfolio monitoring and credit scoring.

The debate as to the long-term effects of the credit bureau is already well under way. Supporters of the scheme point to the likelihood of the cost of borrowing being substantially reduced in the future, in some cases by as much as 30%. Others have warned that, in the short term at least, the full commencement of the bureau’s activities will result in a significant slowdown in personal lending, as banks gain sight for the first time of the complete exposures of their clients. The latter scenario, however, would be a healthy one if customer over-borrowing can be reduced and a prudentially sound, risk-based lending environment engendered. Most crucial, though, will be the greater transparency that the new bureau will bring to the sector, as a result of which future debates concerning lending growth will be significantly better informed.