UAE: Responsible Lending Could Save Millions from Debt Trap

May 2009
Dubai, May, 01 2009 - About 3.2 million, or more than 50 per cent of the UAE's population of roughly 6 million, are labourers, most of whom are not being served properly by the country's banking system.The UAE's financial industry counts on the roughly 2.5 million "bankable" members of the population, leaving the rest unserved - creating an opportunity for new finance companies to tap the market.

Usually the salaries of labourers are not channelled through the banking system, as some bankers think it is "uneconomical" to serve such an "uncreditworthy" class. The majority of labourers get their salaries and overtime paid like in the olden days - at their labour accommodations and in cash brought by security agencies and delivered in envelopes.

When the security vans, guarded by uniformed guards and flanked by the company's accountants, arrive at the labour camps to make payments, these workers line up in queues, in their hundreds, to collect their pay that they had dreamt of earning to support their families back home before landing in the UAE.

Every month workers in hundreds of labour accommodations across the UAE wait for this day - payday - their moment of success, victory, joy, perhaps feast and celebration.

While some celebrate and party throughout the night, others pray.

For many, it is a simple reminder of their families and maturing loans back home.

Many foreign workers, mostly from poor families in Asian countries, borrow hundreds of thousands in their local currency to fund their dream journey to the Gulf, to earn petro-dollars, which takes two to three years to repay - almost the duration of their visa and labour permit.

Many traditional bankers think these workers, who earn between Dh500 ($136) and Dh1,200 ($325) per month are either not creditworthy or lending to these underserved population poses a greater risk, especially under the current economic situation where their job - their only source of income and repayment - is the last thing that is secure.

However, there is one institution that approaches lending differently.

Dunia Finance LLC, a company incorporated in the UAE in July 2008 through an agreement among Mubadala Development Company, Waha Capital, A.A. Al Moosa Enterprises and Fullerton Financial Holdings, has begun its journey through what a top official referred to as "responsible lending".

"We want to reach out to the entire spectrum of society by engaging in responsible lending that offers a complete solution to an individual or an institution," Rajeev Kakar, executive director and CEO of Dunia Finance, told Gulf News.

"Our business model is aimed at empowering the consumer, not to put them in a debt trap. And we do it by trying to understand their needs."

Dunia is licenced by the UAE Central Bank as a fin-ance company. It is not a bank, but it meets a whole range of banking needs, except for traditional retail banking.

Dunia is one of many new consumer finance companies that are trying to tap the market, where customers' credit information is still in the early stages of development.

Emcredit, the UAE's first credit bureau, recently said it aimed to collect bank data on 60-70 per cent of the banking population by end-2009 as lenders realise the urgency of having access to customer credit ratings.

Although the ratio of non-perfoming loans has come down to 5.3 per cent in recent years, new fin-ance companies remain cautious of defaults. They would rather rely on their own customer profiling data.

At launch, Mubadala had said, "Dunia will have a nationwide presence across the UAE and will focus on the retail and small business segments in the UAE to provide a range of loans, credit cards and financial planning services as well as deposits for non-individual customers." The company, which has engaged one of the best suites of technologies, first profiles each customer or potential customer and then provides financial solutions to them.

Although the banks have traditionally served, in a limited way, the consumer finance market in the UAE through retail lending, there has been a growing need for consumer finance in the UAE, if not microcredit, with the retail sector growing at a fast pace. After all, Dubai is the region's shopping paradise complemented by the emergence of organised retail and served by the large shopping complexes.

Like others, Dunia is also developing its own customer profiling to support marketing operations.

Each profiled customer is issued a plastic card with a number that works as a reference point or tool. It helps the customer to access finance, loans and services and the customer relationship official to process the requested services, even in the middle of the night.

However, individual needs are different. One must understand that. How can one manage this?

"Different strokes for different folks," Kakar, an accomplished and seasoned banker, quips.

"We are like financial doctors. The prescription depends on the health check. The more the customer opens up with information, the clearer we are about his problems.

"This helps us to understand the risks and offer customised solutions to them. It also helps us to offer a better rate to the individual." But how does it work?

"With a Dunia difference," Rajeev says. "The way we look at our customers and risks is different from others."

He says four Cs - Capital, Collateral, Character and Capabilities and three Rs - Risk, Revenue and Response - make the key differences in the company's service deliveries.

"Every earning individual is our customer in whatever income bracket they belong. We have solutions for all," Kakar says.

"Aggressive lending could lead a person to fall into the debt trap. We don't want that. We want to exercise responsible lending that helps the customers, and not only us."

"Bankers are boring people and banking is a boring business," Kakar, who rose the ranks with Citibank, says. "However, we want to make it interesting."

The company, capitalised at Dh580 million, has started rolling out services with a staff of 600 professionals, mostly in customer services.

"We will soon expand across the country to serve more people with more service propositions to meet growing customer needs," Kakar said.

Although the UAE's banking and financial services are quite efficient and sophisticated, analysts feel the market for consumer finance and microcredit remains underserved.

Therefore it has a strong potential for growth, especially the larger segment of the population and the small and medium businesses.

Zaid Kamhawi, Emcredit's chief business officer, told delegates at a recent conference that there is "a real need for banks to better assess" their existing portfolios, and to "put in place a strategy" to extend credit further.

The banks in the UAE have become very cautious in lending. But Kakar says the key is responsible lending that can prevent defaults and a crisis.

Source : Gulf News

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