Caught up in a vicious debt cycle

By Stan Szecowka

editor@gulfweekly.com

There has been a 71 per cent increase in the amount of delinquent credit card debt (overdue for more than 90 days) in Bahrain.

The total outstanding amount of delinquent debts reached BD16.4 million at the end of 2006, an increase of BD6.8 million (70.8 per cent) on the BD9.6 million recorded in 2005, says a Central Bank of Bahrain survey.

This naturally means that the percentage of delinquent debts as percentage of total outstanding credit card debt has also shot up – now at 17.9 per cent, up from 12.3 per cent in 2005.

Why are people falling into debt more and more?

The increased use of credit cards and personal loans can be attributed to lifestyle (living beyond means), high cost of living, wage stagnation and the change in spending attitudes in the Middle East.

True the government has taken measures to redress wage stagnation by announcing a 15 per cent salary increase for its employees. But, how many debtors are government employees?

The credit card menace is not unique to Bahrain alone. It is a malignancy that has affected the whole of the region not to speak about the West, where in Britain alone people piled up £1 trillion on credit cards, loans and mortgages 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.

America may be the richest country in the world, yet, ironically, it has the highest percentage of people living paycheck to paycheck.

A recent study by ACNielsen revealed about one in every four Americans say they didn’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.

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 payment system 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.

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.

How did credit cards proliferate so much in the region? Banks are the main culprits.

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 and produces a rapid build-up in household debt, with a disproportionate concentration of debt burdens among riskier card holders.

Card holders, who may be prompt in their initial repayments, later start to default as their debt accumulates and they become overstretched, prompting the introduction of tighter lending standards by banks that suddenly stifles the private credit market and affects the economy.

The CBB survey notes that outstanding credit card amounts increase as a result of the enhanced limits that have been provided to new customers as they utilise their cards.

In Bahrain, however, results for 2006 show an increase of BD1.1 million in total new limits provided, whereas the increase in the total outstanding amounts was more than BD13 million.

The survey – which included seven retail banks and three wholesale banks – reveals the total number of credit card customers in Bahrain increased by 8,130 (5.4 per cent) last year to reach a total of 158,465 customers at the end of 2006.

The total amount of outstanding credit card debt stood at BD91.8 million at the end of 2006, an increase of 17.8 per cent on the previous year.

Meanwhile, 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 BIS’s quarterly review said.

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.

Debt burden and therefore the marked growth in the use 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 fact, for some the use of plastic is a fashion statement too. There seems to be an ever-increasing number of people who find 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.

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.

Cash is an important consumer choice and should not be overlooked. Cash allows one to stick to a budget. But this plan helps only those who have cash. What about those living only on credit cards?

There is no easy answer. At present, it is up to the issuing banks to decide if they want a large card holder segment with lot of defaulters or a relatively smaller group of creditworthy card clients.