GCC banks are over speculating when it comes to the real estate sector. Here are a few tips on how to choose the right bank.
Many of us have been lured by the ridiculously attractive home ﬁnance offers from banks to buy in this “dream” development or that. Many of us have been too eager to sign on the dotted line. Home buyers should exercise prudence so that their dreams don’t turn into nightmares. To be fair, this writer believes that the ﬁrst thing a person should invest in after securing her family’s education and health needs is a home, as long as she is not duped into committing her family’s ﬁnancial future to amateur banks’ unrealistic offers.
There are over ﬁfty banks operating in the UAE, as well as about a dozen “independent” ﬁnanciers who will gladly visit you in the convenience of your ofﬁce or home just to get you to commit to a multi-million dirham loan. These loans could have tenors of up to a quarter of a century and with a “low” interest rate of down to six per cent.
The trouble with banks is two fold. First, some of them are operating on the brink of ﬁnancial disaster, and second, they could take you down with them. Standard and Poor’s recently warned that GCC banks, especially those in the UAE, have been “over speculating” when it comes to the real estate sector, and if there were a banking crisis, then it would damage the entire economy of the country. It is common knowledge that central banks in the GCC aren’t doing their jobs by regulating the sector; proof of which can be seen in the last stock market surge in which leverage was given by “respected and established” local and foreign banks with minimal collateral to buy shares in an already heated and about to explode stock market. Readers can also check the ﬁnancial performance of banks and insurance companies who have suffered in the ﬁnancial year 2006 because a large portion of their income a year earlier basically came from lending to stock investors as well as investing heavily in equities themselves. A recent report by the Abu Dhabi-based National Investor reveals that some UAE banks “were allowing investors to borrow as much as AED99 for every AED they invested in an IPO”. These banks claim to be ready for Basel 2.0 next January when they haven’t even implemented Basel Beta.
Are you willing to tie your family’s future to such unprofessional institutions?
According to an AP report, 1,200 prisoners, about 40 per cent of Dubai Jail’s population, are serving time for not repaying bank loans, most of which go for cars and homes. With one Dubai-based bank’s “generous” (as one radio host referred to it) offer of 99 per cent ﬁnance (another less generous bank offers 90 per cent only) on homes developed by its parent company, it won’t be a surprise if by the end of this year Dubai Jail has to make room to accommodate more defaulters. It sadly seems that local and international banks have not learned their lesson from the Madhav Patel case, when 14 GCC ﬁnancial institutions loaned him AED1 billion on nothing more than empty promises. These banks now expect toothless central banks to assist them in recovering their money. One could ask, is there simply too much money in the region that some are just giving it away?
One would expect that banks would be lining up to make use of the recently established Emcredit bureau, the UAE’s ﬁrst credit agency by the Dubai Economic Department, and yet seven months after its launch only nine banks out of 53 were “in the process of joining”. This reﬂects very poorly on their commitment to the soundness of the UAE economy, transparency claims and, above all, your hard earned cash. Perhaps Emcredit should also start assessing credit worthiness of banks so that consumers are made aware of their ﬁnancial risk before depositing money in them.
Although this article doesn’t tackle non-banking ﬁnance institutions, it is safe to assume that the risk of using them is compounded primarily due to the relatively smaller asset base they hold.
What should you do?
An Arabic saying goes “Stretch your legs only to the length of your quilt”, i.e. don’t spend beyond your means. Stick to banks with larger asset bases and/or credible government shareholding levels. Try to pay back the mortgage as early as possible no matter what penalty clauses your bank threatens to enact. Keep in mind that high ﬁnance rates of 80 per cent and above only tie you and your family up for a lifetime to institutions that are highly exposed to several classes of risk and incompetence.
This article was originally published in MONEYworks on August 2007.