x Abu Dhabi, UAEWednesday 17 January 2018

Common sense on lending regulations

Easy credit can lead to irresponsible borrowing. Contrary to the current system, the solution is not debtors' prison, but more mature lending institutions.

We've all seen the advertisements: drive it starting today, pay for it starting next year. That sort of inducement promises consumers the good life, and on convenient terms. But too often borrowers find themselves driving their sleek new vehicles in the express lane to a serious credit crackup, or even to debtors' prison.

Car loans, mortgages, credit cards, consumer lending: most people who have a steady income, even if it's a small one, can borrow money in one way or another - or rather one way and another - with little difficulty.

But then banks and other lenders enforce their rights with an iron hand, aided by a bounced-cheque law that has landed both Emiratis and expatriates in jail simply because they owe money. Last National Day, the government set up a Dh2 billion fund to clear the debts of Emiratis in default on loans.

As we have noted previously in this space, debtors' prison is counterproductive. Jail is appropriate in fraud cases, but a failed business venture or simple credit-card exuberance should not lead to the lock-up.

Some do defend jail for debt. Nakheel's chairman, Ali Rashid Lootah, recently told the Financial Times that the system provides a "deterrent". But it's not a very effective one.

A pathway out of this swamp is under construction. A bankruptcy law, based on the common-sense principle of rescheduled repayment, is in development and should soon replace the current lose-lose system. And senior officials told the Federal National Council, in its recent session, that a countrywide credit bureau will soon give lenders comprehensive information about the current debt levels of would-be borrowers. That data, which can send a clear "proceed with caution" signal to a lender, should be a basic tool for them, but has not been.

Meanwhile, a planned consumer rights law will impose fines for banks that lend to those deemed likely to be unable to repay, a useful measure.

But it would also help for potential borrowers to understand more fully that prudence can prevent serious problems. In particular, public education programmes can effectively spread the word that consumer debt, used carelessly, can be a dangerous trap.

In the end, measures such as these can move us towards a day when credit is the servant of many, but the master of none.