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 multimillion dirham loan. These loans could go for periods that extend to up to a quarter of a century and with a “low” interest rate of down to 6%.
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 and especially those in the UAE have been “over speculating” when it comes to the real estate sector and if there was a banking crisis then it will 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
Are you willing to tie your family’s future to such unprofessional institutions?
According to an AP report 1,200 prisoners, about 40% of Dubai jail’s population, are serving time for not repaying banks their loans, most of which go for cars and homes. With Dubai Bank’s “generous” (as one radio host referred to it) offer of 99% finance (Mashreq offers 90% only) on Dubai Properties homes (read parent company) it won’t be a surprise if by the end of this year Dubai jails will have to make room to accommodate more defaulters. It sadly seems that local and international banks have not learnt their lesson from the Madhav Patel case when 14 GCC financial institutionsloaned him AED1 Billion on nothing more than empty promises, these banks now expect the 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% and above only tie you and your family up for a life time to institutions that are highly exposed to several classes of risk and incompetence.