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THE old school that teaches one to ‘save up to buy something’ is dead and gone. In these days of easy credit, living on borrowed money is not seen as a bad thing at all.
In fact, for some the use of plastic is a fashion statement too. There seems to be an ever-increasing number of people who finds owning a credit card a necessity. But as soon as the cards are used up, holders find themselves in debt and unable to pay the money back due to interest rates and overspending.
The increased use of credit cards and personal loans can also be attributed to high cost of living, wage stagnation and the change in spending attitudes in the Middle East.
Unforeseen circumstances such as job loss may force people to use credit cards to help them get by. But some people cannot resist temptation and take advantage of the unlimited credit available on a credit card. Then they get new credit cards to pay off the old ones and the cycle continues.
The situation is not better elsewhere in the world. In the UK where, according to the International Monetary Fund, the money Britons owe on credit cards, loans and mortgages topped £1 trillion as of March 2006. Debt is also spiralling out of control in North America – the average per household debt in the US, not counting mortgage debt, is about $14,500.
Consumer credit card lending in fast-growing Asian economies in recent years has been marked by sharp boom and bust cycles that can jeopardise financial stability, says a report by the Bank for International Settlements (BIS).
The use of credit cards in many Asian markets increased three to six-fold between 1998 and 2005, while the average credit card balance per head grew by about the same amount, a study in the June 2007 BIS’s quarterly review says.
Banks are taking advantage of the growth in consumer markets to compete for high yield but riskier business among less wealthy cardholders, by reducing lending standards and making consumer credit more easily available.
This helps fuel consumer spending but also produces a rapid build-up in household debt, with a “disproportionate concentration of debt burdens among riskier card holders.”
Cardholders later start to default on repayments as their debt accumulates and they become overstretched, prompting the introduction of tighter lending standards that suddenly stifles the private credit market and affects the economy.
The bottom line is that, as consumer finance becomes an important part of the financial system, policymakers need to better understand the associated risk and be prepared to respond, the BIS report adds.
America may be the richest country in the world, yet it has the highest percentage of people living paycheck to paycheck. A recent study by ACNielsen reveals that about one in every four Americans say they don’t have any spare cash. Without any wiggle room, it’s easy to see why so many people turn to credit cards to finance life’s little necessities.
A study by GulfTalent.com shows that 43 per cent of the expatriates in the UAE are without any savings. In Kuwait it is 29 per cent, Qatar 28 per cent, Saudi Arabia 23 per cent, Bahrain 19 per cent and Oman 18 per cent.
Residents of the UAE hold nearly one-third of the credit cards in the 275-million strong Middle East and Pakistan region, making it the most important local market for the credit card industry.
Just 8.5 million credit cards have been issued in these emerging markets, according to figures provided by MasterCard.
In the UAE, the second largest Arab nation by gross domestic product, 2.2 million people out of an overall population of 4.1 million have bank accounts. Collectively they own 2.4 million credit cards.
A survey conducted by the Bahrain Monetary Agency found that over 20 per cent of the Bahraini population had credit cards in 2004. Adding a minimum five per cent growth annually credit cardholders in the kingdom would have risen to some 35 per cent.
The marked growth in the issuance of credit cards can be partly attributed to the rise in both expenses and income. There has been an increase in rents, education and other costs. Retail is booming and there has been an increase in conspicuous consumerism.
In Saudi Arabia, out of a population of some 24 million people, there are eight million with bank accounts. Out of this 7.5 million use debit cards, but just 1.2 million own credit cards.
The credit gap grows even larger for Egypt’s 79 million residents, where just 10 million have bank accounts and of these 3.2 million own debit cards. In the region’s most populous country, a mere 1.5 million credit cards are in use.
Albeit in the region 90 per cent of transactions are currently in cash and 10 per cent through credit. Car issuers like Mastercard expects this trend to reverse. Mastercard says it is the practice of paying with cash, and not rivals Visa or American Express, that poses the biggest threat to the company.
Cash is an important consumer choice and should not be overlooked. Cash or the dearth of it allows one to stick to a budget and curtail expenses wherever necessary.
At the same time banks, that have taken a hit from the stock market, would try to hard-sell cards and personal loans to recoup some of their losses.
It is up to the common man to spot the trap and decide prudently whether he really needs a card. A look at this American study would be worthwhile.
It says that at 18 per cent interest, a $2,000 balance on a credit card will take 19 years and cost an extra $2,600 to pay off if you make only the minimum payment required each month. And that’s if you don’t ever charge another penny.
Talking Business
K S Sreekumar
sreekumar@tradearabia.net
