Rob L. Wagner روب لستر واقنر

April 1, 2012

Saudi Consumer Debt Mounts

By Rob L. Wagner

The Media Line

1 April 2012

When Reem Muhammad sought a personal loan to pay off some lingering debts, a Saudi bank offered 100,000 riyals ($26,667). The price tag? Repayment of the loan, plus 33,000 riyals.

“I took the loan and repaid it, but I never knew what the 33,000 was for since it wasn’t interest,”  Muhammad, 38, told The Media Line. “But it sure felt like interest.”

Muhammad is one of thousands of Saudis taking advantage of Saudi Arabia’s healthy economy and banks’ increasing willingness to offer personal loans and credit cards. Her loan also illustrates the continuing debate in the Saudi banking industry whether some aspects of the loan system contravenes shariah, or Islamic law, that guides how Muslims conduct financial transactions.

Personal loans in Saudi Arabia jumped nearly 20-fold to a staggering 219 billion riyals in 2011, up from an estimated 11 billion riyals in 1998.  Loans included 27.7 billion riyals in property loans due in part to the passage of the 2011 mortgage law. Credit card debt in 2012 is estimated about  nine billion riyals.

Asher Noor, chief financial officer for the Riyadh-based AlTouq Group, a global investment firm, told The Media Line the increase in loans reflects Saudi Arabia’s strong economy.

“I find the increase in line with the growth of the Saudi economy, an emergence of an affluent middle class and creation of more high net worth individuals now than at any time in the past,” says Noor, who emphasizes he was offering a personal opinion. “The surge in personal loans is not just due to proliferation of credit cards in the Saudi economy, although plastic money has clearly made it easy to stack up debts. Real estate loans have also been a big reason for personal loan surge.”

Until about 2000, banks were reluctant to issue personal loans to individuals, preferring to limit their lending to large companies. Consumer credit card use was also relatively rare.

However, the demand for easier access to money has increased as the Saudi middle class has grown more affluent. Banks devised methods to offer credit cards compliant with shariah. Islamic law does not permit usury, charging or paying interest and conducting business contrary to Islamic values, such as operating a casino and selling pork or alcohol.

Saudis pay a fixed monthly fee on credit cards. Banks may require customers to have a savings account with a specific amount of money on deposit. Charges for late payments may be about 3% of the outstanding balance. Another way the card issuer earns a profit is to pre-purchase an item a customer plans to buy and then instantly resell it to him at a higher price.

Noor acknowledged there is “cause for concern” over the rapid increase in consumer loan and credit card debt, but the Saudi Arabian Monetary Agency (SAMA) has not allowed it to get out of control. “I think SAMA has not been asleep at the wheel and has kept the commercial banks in check with regulations like limiting loan to deposit ratios.”

SAMA in 2006 established regulations that total loans may not exceed 33% of the total salary of employees and 25% of the income of retirees. Nabil Al-Mubarak, executive-director of SIMAH, told the Arab News that, SIMAH’s policy labels card debtors as defaulters under two conditions: if they have not paid for six consecutive months and if the amount due is SR 500 and more.

Noor said the criteria to issue credit cards is heavily regulated in Saudi Arabia, noting that customers are rarely pre-approved and must prove their eligibility for credit cards. “There are SAMA regulations dictating the credit card and personal loan limits and the central database [Saudi Credit Bureau] SIMAH is monitoring defaults,” he said.

Noor said that given the large expatriate population, whose work and residence permits are linked, banks are very careful in credit card issuances and usually require having a bank account with them, salary transfer and employer letter before a card is issued.

“Since expatriates here are unable to leave the kingdom with credit card debts disproportionate to their earnings or end of service, the banks here have not struggled with staggering default rates as elsewhere,” Noor said.

Yet the explosion in obtaining credit cards and personal loans, and how banks charge fees, has led to consternation among some Islamic scholars whether the high fees are tantamount to paying interest.

Ahmed Alkady, a trainer at the Jeddah-based Islamic Development Bank, told The Media Line that he sees no difference between paying penalty fees and charging interest on credit cards.

“I don’t use or even recommend credit cards,” Alkady said, “It is a hidden type of interest as banks make you pay what they call a fine or a penalty for failing to pay them back on time. The same thing is applied in non-Islamic banks but they call it interest. I see no difference between the two unless you make sure you don’t use it for drawing cash. Or when you buy goods make sure you pay it back before the end of the time limit.”

Alkady also considers Muhammad’s 100,000-riyal loan as contrary to Islamic values with some Saudi banks skirting shariah-compliant regulations.

Islamic banks use an asset-based loan system, such as providing an automobile loan, in which the bank purchases the car, maintains ownership and then rents it to the customer. The customer makes monthly payments that add up to more than what the bank paid for the vehicle. Ownership is then transferred to the customer once all payments are made.

Alkady described Muhammad’s loan was tawreeq, or securitization, meaning the asset is made into financial tool like a share in a company. The transaction originates with an item, such as equipment or even property bought by the bank and then sold to the customer to be paid for on an installment basis. This allows the bank to raise the price of the item as a way of earning a profit while at the same time providing immediate liquidity for the borrower.

However, the Organization of Islamic Cooperation’s International Council of Fiqh Academy, a group of Islamic scholars, ruled in 2009 that tawreeq is “legal trickery” with roots in interest-based lending.

Alkady said the Islamic Development Bank followed with a similar ruling in April 2011. “The bank’s scholars have issued a decree in which they consider tawreeq un-Islamic simply because the bank is selling goods that it does not actually own,” he said.

Yet most Islamic banks worldwide embrace tawreeq, with many Islamic scholars in Muslim countries endorsing the practice.

Sami Al-Nwaisir, chairman of Al-Sami Holding Group, wrote in the Arab News recently that loans “favor the banks and their regulations” and “the unfair contracts by banks designed for their benefit alone, which victimize and suppress the individual through the systematic brutality of the one-sided agreement.”

Noor faults the banks for not educating borrowers. “Islamic banking is asset-based and borrowers need to understand that to better appreciate it,” he said. “Bankers, however, remain the culprit by complicating documentation and structures, and thus making it difficult for the layman to make a rational choice.”
Copyright © 2012 The Media Line. All Rights Reserved.

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February 20, 2012

In Emirates Competition, Abu Dhabi Outclasses Dubai

By Rob L. Wagner

The Media Line

20 February 2012

For much of the past decade Abu Dhabi Emiratis have looked somewhat askance at their neighbors in Dubai who embarked on a mission to build the world’s tallest buildings, the greenest golf courses and the largest shopping malls.

“I know more than a few Emiratis who see what’s happening in Dubai and think of the hadith in the Qur’an about the end of days,” an Emirati businessman told The Media Line and asked not to be identified to protect his Dubai construction contracts. “The hadith says, ‘There will be no Judgment until very tall buildings are constructed.’ ”

Notwithstanding dark predictions of Dubai’s doom, the Emirati’s sentiment illustrates the gulf between the two emirates’ approach to economic diversity.

It’s easy to bash Dubai, which saw hundreds construction projects ground to a halt during the global recession that began in late 2008. Abu Dhabi contributed to a $20 billion bailout package to Dubai. An estimated $4.1 billion of that bailout went to save the government-owned Dubai World.

Abu Dhabi is far healthier, but it also gave loans totaling $10 billion to rescue its own troubled Aldar Properties, which developed such prestige projects as the Yas Marina Circuit for the Abu Dhabi Grand Prix and Ferrari World. The bailout stung so badly that Abu Dhabi’s investment arm, Mubadala, is considering abandoning real estate investments.

But given its wealth, Abu Dhabi is in a better position to be magnanimous. The United Arab Emirates has the world’s fifth largest oil reserves. Abu Dhabi controls 95% of those reserves, holding about 92.2 billion barrels. Dubai has only 4 billion barrels in reserve, which are mostly from offshore oil fields and likely to be exhausted by 2030.

As a result, the oil-poor little brother embarked on a building frenzy that included the world’s tallest skyscraper, the 2,722-foot Burj Khalifa, among other large-scale luxury projects to create a tourist mecca.

The stark reality today is that Dubai’s salad days are over. The Dubai Real Estate Regulatory Authority reported in 2011 that nearly 300 construction projects remained on hold due to the global recession. Nakheel Properties, which created the three iconic man-made Palm Islands off the Dubai coast, has more than 100 projects on hold. Dubai Properties Group lists 42 stalled projects, including the now-suspended high-profile Tiger Woods luxury golf resort.

Robin Mills, head consultant for the UAE-based Manaar Energy Consulting and Project Management, told The Media Line that many Dubai projects might never resume.

“There are major projects not completed, delayed or stopped entirely,” Mills said. “Some projects were more advanced, and some are officially on hold but effectively cancelled and will never come back. And some projects with infrastructure in place will deteriorate and there will come a time when those projects will have to be abandoned.”

He added that the once-promised projected population of one million on the Palm Islands is a “fantasy” in today’s economic environment.

However, Dubai’s debt woes will have little impact on its long-range quest to remain the playground of the Middle East.

Asher Noor, chief financial officer for the Riyadh-based AlTouq Group, a financial investment organization, told The Media Line that although Dubai continues to grapple with slower growth, its prospects are promising for the long haul.

“(Dubai) sure has a short term maturity mismatch in its finances, but given its geographical location, political stability, and relatively mature laws and transparency as compared to its neighbors, I do not foresee Dubai struggling with raising finances,” said Noor, who emphasized that he is not speaking for his employer.

“The Arab Spring has been a shot in the arm for reviving the belief that Dubai is indeed a safe haven for regional investors,” he added.

A key component to attracting foreign investors is for Dubai to move beyond luxury resorts and focus on strengthening its economy, Noor noted.

“Abu Dhabi took a back seat while Dubai went on creating the diamond in the desert,” he said. “I see them as pilots and co-pilots on a long haul flight. Now Abu Dhabi has taken over the pilot duties but that does not mean that Dubai is relegated to an aisle seat in the economy section. What Dubai and Abu Dhabi need is more substance to their economies than skyscrapers or man-made islands. Dabbling in fine arts, music, energy efficient projects, sporting extravaganzas, and developing tourism spots are their equally important priorities. I think they are doing a very good job in the right direction.”

Abu Dhabi, though, has the edge. The emirate’s Executive Council announced last month that it is reviving plans to complete construction of the Zayed National Museum and the Guggenheim and Louvre branch museums. Its centerpiece to strengthen its infrastructure is the Mohammed Bin Zayed City that will feature 349 residential towers and ultimately have a population of about 85,000. The emirate also is building 24 new public schools.

Mills said that Abu Dhabi and Dubai share many similarities in their diversification efforts, especially in attracting more tourists. “The major difference is that Abu Dhabi is attracting higher end tourists with its plans for museums.”

Abu Dhabi also has taken a more aggressive approach in specializing in science, technology and education. Despite the economic downturn, construction of the zero-carbon, zero-waste Masdar City continues with completion scheduled for 2025. It will eventually have about 60,000 workers commuting daily to the city. Masdar City will have a solar power plant, wind farms, gray water recycling, solar-powered desalination and geothermal energy plants.

A central part of Masdar City is the Masdar Institute of Science and Technology, which opened in 2009 and focuses on research in renewable energy and clean technology.

Sultan Ahmed Al-Jaber, chief executive officer of Masdar and chairman of the Executive Committee of the Board of Trustees of the institute, told UAE reporters in January that, “Abu Dhabi is evolving from a resource-based economy to a knowledge-based economy” by focusing on “future leaders in the science and technology spheres.”

Abu Dhabi has also taken the lead in developing a $20 billion four-reactor nuclear power plant at Braka. The emirate has eased U.S. and Israeli concerns by developing a transparent civilian program. The emirate also promised not to reprocess spent fuel or enrich uranium that leads to building weapons. By 2020, the plant is expected to provide 25% of all of Abu Dhabi’s energy needs and 12% for the rest of the UAE.

By pushing for renewable energy and developing an automotive re-export trade center to make up for the absence of automobile manufacturing in the region, Abu Dhabi will become an economic powerhouse.

Mills, however, cautioned that Abu Dhabi investing in infrastructure for renewable energy doesn’t necessarily mean a bright economic outlook.

“It’s important not to overplay clean energy,” Mills said. “The tangible effects now are not much. But Abu Dhabi has a much stronger industrial base in aluminum and petrochemicals than Dubai.”

Dubai, in fact, has performed remarkably well not to depend on oil revenue. “Dubai did succeed in reducing its dependency on oil,” he said. “Aside from tourism, the Dubai government is getting revenues come from customs duties, various local taxes, road fees and government investments.”

Mills said that not only is Dubai’s economic model sustainable, its geographical proximity in the Arabian Gulf makes it an ideal trade center. “Dubai attracts so much for its services in the Gulf, and no other Gulf countries come close,” he said.

Abu Dhabi is likely to open its checkbook again as more debts mature in 2012, including Dubai Holding Commercial Operations Group’s looming $500 million debt repayment. It’s an object lesson that will dictate the economic future of the two emirates, said financial analyst Noor.

“The real estate crash left a very sour taste in many a mouth and investors and developers are still struggling to recoup their losses, let alone (see) any upside,” Noor said. “It has not only been a humbling but a very important learning lesson for many who now understand what Warren Buffett means when he says be fearful when others are greedy and be greedy when others are fearful.”
Copyright © 2012 The Media Line. All Rights Reserved.

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