High service fees charged by banks and excessive lending practices are the targets of a host of retail banking rules issued yesterday by the Central Bank.
The legislation follows a rise in the number of complaints from customers unhappy with how much banks are charging for basic services. It also comes in response to a wave of bad consumer debt that left some banks with big losses during the financial crisis.
The new rules cover personal and car loans, with limits capping the amount banks can lend to customers at 20 times their salary. They also set the period of loan repayment at 48 months. In addition, the rules restrict service fees lenders can impose for personal accounts, cheques and debit cards.
Further rules governing property loans will be announced within two months, said Sultan al Suwaidi, the Central Bank Governor.
Customers are likely to welcome closer control of banking fees but analysts say the limits could restrict banks' fees and commission revenue, an important driver of growth. "Personal consumers started to complain to the Central Bank and we have seen a lot of complaints," Mr al Suwaidi said yesterday.
"As a result of the global financial crisis, banks wanted to compensate for loss of revenue so they increased the variety of service fees that were not there two years ago, and they increased the rate of existing fees."
The regulator said the new regime would also be of benefit to banks by ensuring they lent only to customers with enough income to repay loans.
Previously there was a Dh250,000 (US$68,066) ceiling on personal loans but few other limits on service fees. As a result, banks were able to extend huge loans to consumers.
However, some borrowers became unable to repay the debt once the financial crisis hit and caused job losses throughout the country. The build-up of bad loans has been blamed in part for sluggish lending as banks remain cautious about exposing themselves to fresh risk.
Excessive lending contributed to increasing the financial system's ratio of loans to deposits to 114 per cent at its peak in 2007, far higher than most other countries.
Officials yesterday said they wanted to see the loan to deposit ratio come down to a more sustainable 85 per cent.
The Central Bank's rules are also aimed at improving standards of retail banking services. Some consumers have had their service fees rise since the start of the financial crisis. The rules will curb banks' ability to raise fees.
"We have compared fees in the region and put them slightly above regional fees, but not as high as banks wanted," said Mr al Suwaidi.
Under the rules, banks will be limited to charging a maximum of Dh25 for replacing lost or stolen ATM cards.
Closing an account within a year of opening will cost customers no more than Dh100. The cost of issuing a chequebook will be capped at Dh30.
Fees for loans will also be regulated. Processing fees for personal loans will be capped at 1 per cent of the loan amount.
Penalties for early payment of a loan will also be curbed. Banks will not be allowed to charge more than 1 per cent of the remaining loan balance if a customer settles a loan early.
The rules could hinder the ability of banks to raise money from fees and commission, said Raj Madha, a banking analyst at Rasmala Investment Bank.
"It does look quite restrictive on personal lending and could have an impact on personal lending volumes as a segment of the population deleverages," Mr Madha said.
The legislation has been distributed to banks and will become active once published in the official Gazette.
Banks have already been consulted on the changes and will be able to have further input through the Emirates Bankers Association, officials say.
Those not complying with the rules will face fines.