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The subprime crisis in the US may have rocked the financial markets across the world, brought down banks and pushed the US economy into a recession, but the silver lining is that the crisis has awakened the world to the urgent need for financial literacy of the masses.
The US has embarked on a mission to improve the financial literacy of its citizens. So have the UK, Europe and Russia. While the US Congress has declared April a month of financial literacy, the World Savings Banks Institute, which represents retail and savings banks from 92 countries, launched a programme for financial education in the developing countries last month.
Although the Gulf region was not directly impacted by the subprime crisis, we too have a different kind of credit crisis developing in our backyard.
According to the latest statistics from the UAE Central Bank, overall bank lending and personal loans surged by 40 per cent and 39 per cent respectively last year. Loans to individuals in the county rose to Dh43.46 billion as at December 31, compared with Dh31.26 billion a year ago, while the economy is struggling to cope with double-digit inflation. Going by the central bank's statistics, consumer lending has almost doubled over the last four years.
Independent studies also confirm the personal debt build-up in the country. The data from UK-based Lafferty Group, which conducts financial research around the world, found credit card debt in the UAE increased 35 per cent last year to $2.7 billion (Dh9.9 billion) compared to $2 billion in 2006, while personal consumer loans topped Dh41 billion in the third quarter - a rise on the $8.5 billion at the end of the previous year.
And, depressingly, data from the Dubai Police Department suggests that more than 42 per cent of inmates at Dubai Central Jail last year were there for failing to repay loans. Data from other GCC states too are not comforting either. Consumer debt in the region is expected to rise to about 60 per cent of private consumption this year - very high by any standards - as banks ride a wave of growth in the region's credit card and personal loan market, according to Lafferty's estimates.
Little action
Although the UAE's Federal National Council, Saudi Arabia's Shura Council and Kuwait's parliament aired their worries last year, amidst some calls to set limits on bank lending, nothing significant has been done to curtail the growing credit culture in the region.
The political establishments and regulators are aware that banks are not entirely to blame. Banks do follow an installment income ratio (IIR), which ensures that individuals are not debt-trapped. However, it is often individuals who hoodwink the system through multiple means of personal leverage.
Although a 'nanny state' approach is not the ideal solution, it seems should be something done to alleviate this situation. Probably, education is a better path than legislation and coercive measures.
In this age of instant gratification, we appear to be taught that if you want it, borrow the money, use your credit card, remortgage the house and buy it now. The whole concept of saving enough to own something is no more the norm. It may be time that the schools in our region covered basic financial education in their curricula.
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