During the Gulf's boom, virtually anyone could get a loan or line of credit. A lack of financial reporting and a mass of clients demanding credit cards created a culture of freewheeling lending practices, which in turn fed a consumer culture. According to Lafferty Group, a London-based credit research firm, consumers in the Gulf owe roughly US$139 billion in personal debt. Often, common business sense seemed to have been missing in banking. Local media, social workers and industry analysts have reported anecdotes of people with no credit history and low wages receiving multiple high-limit credit cards.

Authorities in the region have taken measures to bring more transparency to the industry. In the UAE, the first credit reporting bureau was opened and has begun receiving lending information from a few banks. Most regional banks, which are now saddled with millions in bad debt loads, have tightened access to loans and raised requirements for credit lines. Yet bad choices persist. High-limit credit cards are still being offered, but now with interest rates topping 30%, and market surveys suggest credit card spending will continue unabated. There are also few solutions for the number of expatriates and businessmen who are being held indefinitely in Dubai, as being unable to pay back debts, or bouncing a check, is a serious offense.

Easy Lending Regime

Just before the Middle East's economy was hit by the global financial crisis in 2008, the Lafferty group estimated the number of credit cards in circulation would rise by 51%. Among the five countries in the Gulf Cooperation Council (GCC), total credit card dues stood at US$5.25 billion in 2006. It was a pace of growth "dwarfing the rest of the world," the firm noted, and a highly profitable trend for banks. The firm reported that pre-tax profits of the credit card industry then were US$300 million, and expected a 22% profit increase for lenders by 2008.

The rush of customers adopting plastic fueled a culture among banks in the region to push credit card products, says Shahab Jafry, an economist with Dubai-based Orion Analytics. "Promotions were being given out based on the number of transactions made," Jafry notes. "It was a credit card Gold Rush."

But just as rapidly as growth in the credit card industry occurred, the global recession's affects on the region brought it to a crawl. According to the country's central bank, loan growth in the UAE is now 5%, compared to 38% two years ago, while banks have reduced personal lending by over 86% last year. At the same time, the Gulf experienced a widely publicized phenomenon of jobless expatriates abandoning lives overnight to return home, rather than facing the prospect of jail. In Gulf countries such as the UAE, it is a serious offense to default on a loan or debt.

Jafry's firm was hired by the Dubai government to examine the issue, and the report it produced was a critique of bad practices in the banking and credit card industry. "Our team's research … shows that the easy lending regime that typified the credit expansion earlier in the decade contributed just as much to [people] skipping [the country] as the strained credit market in the wake of the international recession," the Orion report stated.

"As banks provided the personal loan and credit card window to virtually all income groups across the working class, including laborers and low wage earners, easy loan and credit card advances induced both willful default and increased speculation, especially in the real estate sector where flipping inflated the bubble that burst with severe consequences.

"In this way, outright due diligence failure on part of risk management departments across commercial banks resulted not only in an unwarranted outflow of credit, but also rampant speculation that brought about second round hemorrhaging of liquidity just as the international financial crunch set in."

Spendthrift and Extravaganza

Banks should bear responsibility for their lending practices, says KV Shamsudheen, chairman of Pravasi Bandhu Welfare Trust, which advises middle class Indians in the Gulf on how to better manage their financial matters. "I had come across cases of a multinational banks salesman issuing credit cards to three persons with limit of US$8,000 where as these people had salaries of US$270 per month," he notes. "I came across people having more than 10 credit cards and outstanding debts more than fifty times of their salary."

But Shamsudheen adds that financial institutions alone cannot be blamed, since their customers willingly lived beyond their means. "People are spending exorbitant amounts to buy expensive cars and build houses, but they never think whether they can pay back the loan easily," Shamsudheen says. "People must live within their means. But people are after spendthrift and extravaganza."

Jafry's report broke down by nationality the people who fled their debts in the UAE, and found Indians were the most likely expats to do so. The community has suffered since the recession, Shamsudheen notes, as a large number of Indians are now in jail because of debt defaults, while banks have enlisted harsh collection agencies to track down debt absconders. "I have seen cases of debt collectors harassing parents and wives back home in India for the loans taken in the Gulf by their sons or husbands," he says.

Not all of the debt belongs to people who unwisely burned through credit. A number of businessmen who were unable to pay back loans on time because of cancelled contracts, or found themselves short of funds to cover payments, were also caught up in the Gulf's harsh debt rules. Human Rights Watch, in a report on migrant workers in the UAE, noted that "even after completing their sentence, debt prisoners are likely to remain in jail until their debt is paid off." The problem with such an approach is obvious, Jafry says. "It's a self-defeating process. Most people cannot generate funds while in prison."

Introducing Reforms

Most government officials remain unmoved by such arguments. In March, Saudi Arabia strengthened its rules regarding bounced checks, adding jail sentences and public humiliation as punishment for offenders. Acknowledging the concerns of advocacy groups, though, the UAE's legal system introduced initiatives to speed up the process of resolving such cases. Separately, a special court has been convened this past month to solely hear bounced check cases. But advocates say more is needed.

Meanwhile, the ruler of Dubai and the UAE federal government has put their support behind collaborative credit reporting, and the country's first credit bureau, Emcredit. Detailed records of bank clients will be shared among banks, which are expected to influence lending decisions. The adoption of a shared credit reporting system, though, is facing some resistance among the traditionally competitive financial institutions. Only four banks have currently signed up for the system, according to Emcredit.

"Banks here have only started collecting consumer data, it will take about three or four years before the credit bureau is effective," suggests Janay Vamadeva, a banking analyst at Al-Futtaim HC Securities in Dubai. Beyond the collecting and sharing of customer financial information, Vamadeva says the banking industry has to do a better job of maintaining their financial records, continue to raise their criteria for lending and provide more training for their employees. "They have to learn the lessons of the crisis," she adds.

There have been some changes in the way banks approach lending. Now, most institutions require blank checks from customers as security before providing loans. Other institutions have decided to vie for the business of customers native to the Gulf — most of whom are very wealthy — rather than expatriates, deeming them to be recession-proof and less of a risk to default and fleeing the region.

The crash hasn't entirely wiped out the lending industry in the region. While local banks have cut back on their loans and lines of credit, Vamadeva says international banks are still offering credit cards, albeit ones with interest rates topping 30%. And people still feel they have disposable income, according to a Mastercard consumer confidence survey conducted in July. Over the next six months in the UAE, the survey found, almost 83% of residents were feeling optimistic about the future, and intending to spend on dining and entertainment, international personal air travel and fashion and accessories.