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Some (generally) good moves

Some (generally) good moves

The Central Banks new retail banking rules are a welcome intervention… for the most part. There’s just one little thing bothering us.

February 28, 2011 3:06 by

As I say, none of this can be a bad thing. I just have one complaint: Among the new rules, the Central Bank has also given instructions on how big a personal or car loan a bank may make. The new rules state that a bank may only offer a maximum of 20 times the applicant’s salary, with a set loan repayment period of 48 months. Previously, the limit was anything up to AED 250,000 on personal loans.

This is something that makes me very uneasy. While rules that protect a consumer are welcome (such as the limitations on charges), rules that seem to be designed to protect the bank, and penalize the consumer, are not. Perhaps they are trying to reduce the personal debt problem in the Emirate, although it’s a hard to believe this is an effective way to do so; 20 times your salary is still a huge amount of debt.

Whatever the motivation, banks are, for the most part, well established, experienced, and staffed by professionals. They are best placed to decide who is credit worthy and how much a person should be loaned, and it should be their prerogative to decide. More than that, they should be able to decide over what period a loan is extended, so they can be flexible and adapt to the borrower’s repayment ability, and so minimise their exposure to ‘bad’ loans.

And let’s take a friend of mine as a different example; until recently he earned big bucks, enough that he has a number of investments and some property. Financially secure, he gave up his job for a much lower paying, more fulfilling vocation. He has several major assets against which he could borrow from banks if he wished, but based on his salary he would be severely limited by the new rules. The banks should be able to loan him as much as it likes, on the grounds he has assets to cover the debt. Instead it may be unable to.

Just a quick example, off the top of my head, of why I have misgivings over this new rule. Of course that’s an over simplification, I’m sure, but I am still uneasy about a rule that dictates to what extent a customer can borrow from his bank.

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