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Learn More About: Why are UAE Residents overburdened with Debt?

Updated on September 7, 2015

Introduction

What if you take a credit and cannot repay it to your bank on time? You get overburdened with debt and turn into a cranky individual. Gradually, it begins to affect your personal and professional relationships and makes your life a living hell.

So, before you borrow, pause and think. Do you really need extra cash? If not, don’t go ahead. Even if you borrow, don’t borrow beyond your capacity for repayment. It helps in the long run.

UAE residents become overburdened with personal debt.
UAE residents become overburdened with personal debt.

Off late, it is noticeable that the UAE residents become overburdened with personal debt. Most of the UAE residents fall victim of heavy bank loans. They are so neck-deep in debt that almost of 7 out of 10 people use their bonuses or any other extra income that they earn to clear their existing debts. Having failed to repay debts, many people have committed suicide and many expats have run away to avoid being penalized by banks. There are instances when many borrower has gone to jail for bouncing post-dated cheques.

The most common types of debts experienced by the UAE residents are car loans, personal loans, home loans and credit card bills. In fact, nearly 60% of its population spend their whole monthly income in repaying their debts. Therefore, financial insecurity has become a major concern for the people residing in the UAE where nearly 50% residents reportedly do not have any savings plans who get frequent threats from their lenders.

This increase in personal debts has posed a lot of challenges to the lives of people living in the UAE. Many people who are overburdened with debt suffer from various instabilities in their lives. Debts make them unhealthy by increasing their stress and anxiety. According to a survey made by the Anti-Narcotics Department of Dubai Police, a considerable number of divorce cases and alcohol addictions are seen among people living in the UAE who are financially unstable and overburdened with debts. In fact, a correlation is noticeable between debt, drug and addiction in the UAE.

So, what are the major factors behind this huge increase in debts in the UAE?

Easy process of getting credits

The banking system in the UAE maintains a very easy process of delivering credits. Because of this easy and simple process of lending, people get easily tempted to borrow as much as they can. All banks in the UAE provide loans at low rates of interest. In fact, many people residing in the UAE blame the banking system for persuading them to borrow huge amount of money in the form of loans and credit cards.

Since the United Arab Emirates has a stable economy and it is considered as safe haven, both the UAE residents and expats have made huge investments in various trades in the UAE. At the same time, because of its stable economy, banks in the UAE still continue to provide lower rates of interest on loans. So, it becomes easy for the investors to borrow huge amounts at cheaper rates and invest them in various business ventures. Even many banks seem to violate certain norms and sanction huge amounts to investors and common people without making proper verification on their income details.

But, when it comes to repayment, if people, be it investors or common citizens, fail to repay their debts on time because of some unforeseen situations, banks will charge heavy penalty fee along with its predetermined interest rates. So, be careful about taking credits in the UAE. Applying for a credit is very easy in the UAE, but if you fail to repay it on time, disastrous consequences await you.

The ease of borrowing process tempts people to borrow as much as they can.
The ease of borrowing process tempts people to borrow as much as they can.

High Cost of Living

Gradually, the cost of living is has gone up in the UAE. People living in the UAE lead a lavish lifestyle and in doing so they spend a considerable amount of their savings on it. Beside, car loan rates are very cheap in the UAE and many banks even offer 100% finance on new cars. So, people easily get tempted to borrow money and purchase luxurious cars without realizing the fact that their debt level goes up.

People lead a lavish lifestyle and spend a considerable amount of savings on it.
People lead a lavish lifestyle and spend a considerable amount of savings on it.

So, when other priorities in life occur, they have to borrow money to fulfill those requirements and get overburdened with debts. In fact, most of them use their official bonus to pay off their financial liabilities. Thus, this rising of cost living is one of the many reasons why many expats in the UAE decide to leave the country. Because they cannot afford to save for their future. Normally, people take the decision of shifting to the UAE mainly to earn more and save for the future.

Expensive health care

The cost of healthcare in the UAE is comparatively higher than many other countries like Africa, Europe and India. In the UAE, children and senior citizens spend a considerable amount of money in healthcare expenses. In many cases, health insurance policies do not cover all ailments. Besides, the cover offered by health insurance policies may not be sufficient to meet their medical expenses. To handle such medical debts and meet your other priorities in life, people end up borrowing high amounts as personal loans. People get completely ruined by paying medical bills and they don’t have any other option apart from borrowing cash.

So, it’s always better you develop the habit of savings to avoid being overburdened by debts. If you are planning to shift to the UAE, it’s advisable you plan for your medical cost in advance and buy adequate cover for you and your family. Because, you may not be able to bear the burden of private healthcare in the UAE and it may overburden you with debts. Don’t forget, medical bills can indeed force you into financial ruin.

Increase in Property Prices

The property price in the UAE goes up in the recent time. Dubai and Abu Dhabi have witnessed a spectacular growth in their property values. Simultaneously, the construction activities are also going on in full swing in response to the huge demand coming from people for purchasing properties in the UAE. Since, the price has gone up, both the UAE citizens as well as expats need huge amounts to invest in the property market. As a result, they end up borrowing high amounts of money from banks and fall victim of heavy debts.

The growth in economy has increased property prices in UAE.
The growth in economy has increased property prices in UAE.

Poor Financial Literacy

Another reason why people residing in the UAE are overburdened by debt is poor knowledge of personal finance among its residents as well as expats. The basic knowledge of personal finance skills can help people avoid being in debt and control budget. It also helps in maintaining a healthy cash flow. But, according to a survey conducted by Western Union in the UAE, a lot of UAE residents as well as expatriates working there as domestic help, hotels cleaners, housekeeping staff in private household and hotels don’t even know the basic things about finance.

Keeping in mind the growth of debts among the residents of the UAE and its negative impact on their lives, private organizations like Western Union has started creating awareness among people regarding how to reduce debts among the residents and improve their financial health. In fact, the UAE Government has also established Al Etihad Credit Bureau to keep a record of each individual’s credit history. Al Etihad Credit Bureau will keep a record of your existing debts, credit card accounts and all bank accounts and help banks take informed decision while delivering credits to you. It is expected that the move taken by the UAE Government would be able to reduce debts among the UAE residents by imposing restrictions on easy access to credits.

Since you cannot avoid being penalized by banks for not paying your debts on time, it’s important you practice the habit of borrowing less and curb your unnecessary spending. Make a well- thought financial plan for the year and spend accordingly. It will help your keep a track of your financial activities and save a lot so that you don’t have to borrow cash to fulfill each single necessity in life.

What do You think?

According to you, which factor has contributed more to increasing debts?

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