UAE mulls credit card rate cap

The UAE Central Bank has told lenders in the country to urgently supply it with reports on interest rates and fees they impose on credit cards in a move that could be a prelude to impose ceilings on such rates.

According to the Sharjah-based Arabic language daily Al Khaleej, the Central Bank made the request in a letter sent to the 23 national banks and 28 foreign units on Thursday morning, asking them to provide the information before the end of the work hours on that day.

The paper said rates on credit cards in the UAE are the highest in the six-nation Gulf Cooperation Council (GCC) as they range between 27 and 36 per cent compared, for example, with 18 per cent in Kuwait and Qatar.

It said the letter asked banks to supply detailed information on all fees and interest rates charged by banks on credit card services, outstanding debt, withdrawn funds, debt defaults and other services.

“A senior finance source said initial information shows that the Central Bank is considering imposing a ceiling on those rates and fees as well as Islamic credit card fees…the sources believes the Central Bank is in the process of setting the maximum rate on unpaid credit card loan at 1.5 per cent or 18 per cent as an annual rate on part with other GCC countries,” the paper said.

“The source said the Central Bank’s move follows a sharp rise in those fees and interest rates in the absence of any regulations on credit card by the Central Bank as is the case in personal lending… The source said many banks have largely raised those fees to make up for a fall in revenue from other services, adding that such increases have prompted the urgent measures by the Central Bank which could announce new rules in the near future.”

Banks in the UAE charge the highest interest rates on credit cards in the region, according to a survey that also found customers, disgruntled by inadequate banking measures, complaining about the hike in service fees.

A study published by Al Khaleej in 2011 revealed the interest rates range between 2.25 and 2.99 per cent in the UAE, which is equivalent to about 27-35.88 per cent annually, while it ranges between 1.6 and 2 per cent in Saudi Arabia; 1.5 per cent in Qatar; 1.74 to 1.83 per cent in Bahrain; 1.5 per cent in Kuwait; and 1.5-1.67 per cent for local banks and 1.75 to 2 per cent for foreign banks in Egypt.

Several respondents expressed dissatisaction about banking services and were of the opinion that banks were making profits at the expense of customers with dispropotionate fee hikes, especially in the wake of doubtful and bad debts.

Banks need to set aside more provisions to deal with such debts in the absense of a Central Bank directive regarding service fees, said customers. For instance, Qatar Central Bank set a ceiling for service fees by banks to individuals. This resulted in healthy competition among banks wherein each lender raised the bar on quality of services offered. Whereas in the UAE, in the absence of a ceiling, banks raise service charges randomly, said customers.

Disgruntled respondents also alleged that banks offer generous limits to customers that should not even qualify for a credit card, and then safeguard themselves by insuring those crads and charging the insurance premium to the customer, thus adding to his or her repayment burden. While this does protect the banks in case of a default, such practice cannot be termed ethical, said a section of respondents.

Often UAE banks attribute the fee hike to cost of technology, and there are times when new charges are thrust upon clients, the survey found.

Al Khaleej reported one such incident, where a client, after having paid regular installments on his loan for a year, decided to close it by making one payment for the rest of the due amount. But he was surprised to find that the bank, meanwhile, had increased fee for early repayment. He dropped the idea of single payment and continued with monthly installments because the interest for remainder of the premium would be equal to the repayment fee.

Some UAE commercial banks charge additional insurance premiums, too, said respondents.

As reported by this website last month, a sharp expansion in fees imposed by banks in the UAE on credit card holders has prompted the central bank to study the issue to check whether banks are overdoing such fees.

In case the fees are found too high, the central bank may intervene as it has done in personal lending when it enforced new rules in mid 2011 setting limits on the size of the loan provided by a bank to an individual client, the Dubai-based Arabic language daily 'Emarat Al Youm' said in a report in December.

“The central bank is now studying fees imposed by banks on credit cards to determine whether these fees are exaggerated as it has done in personal credit,” the paper said, citing “informed” banking sources.

It said the central bank’s move followed a sharp rise in fees on credit credits and complains by clients about the introduction of new fees, including “maintenance and account statement fees.”

Other fees imposed by both conventional and Shariah-compliant Islamic banks comprise annual fees on the card, grant fees, charges on exceeding the card limit, default fees, foreign exchange dealing fees, credit card replacement fees and fees on payments at a third party.

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