UAE reduces cost of debt for businesses
NEW LAW REVISES UPPER LIMIT ON INTEREST RATES FROM 12% TO 9%
The UAE’s revised Commercial Transaction Law has sought to reduce the cost of debt obligations for businesses by lowering the upper limit on interest rates charged. This, however, only applies to those loan contracts where the interest rate obligation has not been stated.
This is what the Law states now: ‘The creditor shall have the right to charge interest on the commercial loan as per the rate stated in the contract.
‘If the interest rate is not determined in the contract, it shall be calculated as per the interest rate prevailing in the market at the time of transaction.
‘However, in this case, the rate shall not exceed 9 per cent per annum until full payment.’
According to Atik Munshi, Managing Partner at Finexpertiza UAE, “The previous version had a maximum limit of 12 per cent. The change to 9 per cent will influence future court decisions in case of disputes and interest rate norms would likely be changed accordingly.”
Balancing debt exposure
At the same time, the Law has placed the onus on banks to ensure they have enough safeguards when lending to businesses. What this means is banks are required to ‘obtain sufficient guarantees against the loans they offer’.
According to a banking source, the extra caution is warranted. “UAE banks have worked to bring down their impairments diligently through two difficult years, with Covid creating a whole set of disruptions to clients,” he said. “When they come out, the 2022 full-year results of banks will show the improvements made – what’s required is to continue this trend.
Parents in the UAE who are planning to take out some heavy personal loans to fund their children’s college education will have to do some tough calculations and budget planning to do. Because after more than a decade, the interest rate burden they have to bear is becoming higher with every other month — until such time the US Federal Reserve decides rates have gone up enough to tame inflation.
But that will be scant consolation for those thinking of a loan, because successive rate hikes through 2022 have already had an effect on demand. Banking sources talk of mortgage pick up slowing down in the early days of 2023, a continuation of the trends that were there in Q4-2022.
While many parents dig into their savings or have systematic investment (SIP) schemes, they also resort to taking personal loans at high interest rates to pay for their kids’ uni-fees. However, unlike in the West, banks in the UAE provide loans for educational purposes to students based on their parents’ credentials and financial health.
However, they cannot avail of education loans unless the parents have a minimum monthly salary of Dh7,000.
The average tuition fee for undergraduate courses in UAE ranges from Dh37,500Dh70,000 a year. For postgraduate programmes, it goes from Dh55,000-Dh75,000 annually, not including the cost of living expenses.
The cost of studying abroad can go up to Dh250,000, depending on the country and the university chosen.
“Students who want to move out of the UAE for their higher education cannot afford a loan in this case,” said Sandeep Jadwani, Head of Investment Advisory at Habib Investment. “That’s why loans offered are connected to the financial credentials of the parents.
Asset-backed loans?
To ease the stress of paying for the tuition fees, personal finance experts say asset-backed loans are becoming a popular option among families in the UAE, seeking loans to pay for their kids’ education. A ‘secured’ loan is where a borrower pledges an asset as collateral.
This way, the borrower can seek a higher loan amount – and at relatively affordable interest rates. Expatriate borrowers can avail up to 75 per cent of the asset’s value. Leading
banks - including Emirates NBD, Commercial Bank of Dubai, RAKBANK - offer such instruments to business owners on their movable and immovable assets. The loans can be used for personal purposes.
“When parents take loans from banks back in their country of residence, they face the risk of volatile foreign exchange,” said Jadwani. “This has seen many expat parents take loans in the UAE and backing that against property, which is a popular choice.”
High interest rates
However, higher interest rates still act as a deterrent for such loans. According to Damodhar
Mata, a Dubai-based financial advisor, interest rates on asset-backed loans in the UAE currently stand at 5.9-6 per cent per reducing rate per annum. “Only a year ago, it was 1.99 per cent,” said Mata.
For example, if a parent has an asset worth Dh1 million in the UAE, with an outstanding mortgage of Dh 500,000. “Banks can release an additional equity of Dh250,000 as a topup loan on the same property, which a parent could use to pay university fees,” he added.
The parent’s total loan amount would be the outstanding mortgage plus the top-up loan, which is Dh750, 000. In this case, the parent ends up paying Dh14,253 per month for a reduced interest rate of 5.29 per cent for 60 months. Parents can get a loan for up to 25 years against their property in the UAE.
“These are mortgage loan buyouts being offered by the bank, and in such cases, the parent should have a monthly income of Dh30,000 and above,” said Mata. (If the parent avails of other credit products such as bank loans or credit cards, they may be overburdened with debt.)
The interest rate for a personal loan against property could be relatively low since the property acts as a reliable form of leverage in the eyes of the financial institution.
Refinance?
Refinancing their loan through a balance transfer may be an option for parents looking to lower their interest outgo, said Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors. “Additionally, if their cashflow or monthly income allows them to pay a higher loan instalment, they should evaluate taking a shorter tenor loan so that the overall interest paid on loan can be lowered,” said Dhawan.
Education loans are still not very popular in the UAE, as banks issue such loans on commercial terms on a four-five year repayment terms.”
Sandeep Jadwani | Head of Investment Advisory at Habib Investment
It is also important that the parents do not compromise on their retirement savings corpus in paying for the education.”
Vishal Dhawan | Founder and CEO of Plan Ahead Wealth Advisors
These are mortgage loan buyouts being offered by the bank, and in such cases, the parent should have a monthly income of Dh30,000 and above.”
Damodhar Mata | Dubai-based financial advisor
Overdrafts
Some families are also opting for overdrafts, which is common among salaried customers. An overdraft facility provides parents with instant cash support of up to two times the salary. However, these are expensive as they are unsecured and have high-interest rates.
Some parents also take personal loans from non-banking financial companies such as Dunia and Gulf Finance.
Approach the university
Parents can approach universities here and abroad to provide an interest-free instalment plan for outstanding tuition fees. In this case, parents pay higher education fees monthly, like school fees or rent.