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Salary collateral for personal loans not acceptable: Experts
Prominent Saudi financial and legal experts say the current practice of local banks receiving personal loan repayments directly from the salaries of borrowers is a clear legal aberration that is unacceptable.
Dr. Abdul Rahman Al-Sultan, an academic and economic expert, noted this practice serves as a motivation for local banks to extend more personal loans to employees without taking into account their solvency.
He urged concerned authorities to protect borrowers from the dangers and risks involving personal loans and not to allow banks to exploit them.
“Apparently, banks are able to solve all the problems related to personal loans following a directive by Saudi Arabian Monetary Agency (SAMA), the central bank, allowing them to treat the salaries of borrowers as security if they take out personal loans. This has helped banks to expand their base of personal lending substantially,” he said, adding that personal loans with salary collateral forms a major segment of banking credit in the Kingdom.
Speaking to Al-Eqtisadiah business daily, Al-Sultan said banks in any developed country in the world are not allowed to use the salary of individuals as security for personal loans.
“In those countries, banks must seek security sources other than salaries, which represents the source of the borrower’s livelihood and cannot be put in any risk. We see banks in advanced countries accept real estate as collateral to secure a real estate loan or vehicles to obtain a car loan,” he said.
According to Al-Sultan, SAMA’s directive to employers to issue letters to the concerned banks allowing the transfer of employees’ salaries for the repayment of their personal loans virtually serves as an incentive for banks to continue to promote such products.
Subsequently, this would become a big economic burden on employees. “Local banks deduct monthly installments for the personal loan from the salary of the employee before it reaches him.
He has to then budget the remainder to meet other expenses,” he said.
Al-Sultan pointed out that in the past Saudi banks adopted a more cautious approach when extending personal loans. “But now they compete with each other to give loans thanks to the SAMA directive with regard to salary collateral. Until 10 years ago, the total value of personal loans extended by Saudi local banks was less than SR10 billion. However, now the value has exceeded a whopping SR200 billion,” he said.
He noted that many citizens take loans after giving their salary as security to pay for things such as vacations abroad. “As a result of this, most citizens shoulder a heavy burden of personal loans. Therefore, they can draw only a portion of their monthly salary which is quite insufficient to meet their day to day necessities,” he pointed out.
Al-Sultan urged SAMA to review its decision. “SAMA should fulfill its responsibility to protect the interests of those who take out personal loans by scrapping the rule that salaries must be used as collateral. Instead, employees who have personal loans must be given full freedom to transfer their salary to any other bank they choose,” he said, while noting that nearly 70 percent of personal loans in the Kingdom are based on salary collateral whereas in the United States the collateral of about 80 percent of personal loans is real estate.
Fadl Albu Ainain, another economic expert, said banks in the Western countries rely fully on the credit ratings of personal loan applicants. “This is the criterion when taking a decision on whether to grant a loan or not. This shows the keenness of customers in those countries not to encounter any future troubles with regard to their credit ratings and thus they can ensure their solvency in order to take out a loan any time in future,” he said. “However this credit awareness is not seen in the Saudi market. Here customers are not at all bothered about credit ratings, at least for the time being.”
Ainain hoped that there would be more focus on credit ratings in the Kingdom in future. “A borrower should be keen on the repayment of loans without reaching a stage of insolvency. When we reach such a level of solvency, then there would be no need to rely on transferring a portion of salaries to the bank to repay a loan,” he said.
Ainain warned about the prospect of a flourishing market for brokers and agents who approach insolvent beneficiaries with personal banking loans. “These agents would levy a commission of about 30 percent of the loan amount from their clients,” he said.
Nazeeh Mousa, a lawyer and legal consultant, said taking the salary of employees as collateral for loan repayment is the only option banks have to get their money back from the borrower. “Every bank is a joint stock company and they are accountable to their shareholders. Banks cannot be irresponsible, and therefore they need to ensure prompt repayment of loans by their clients,” he said.
Mousa noted that most international banks take punitive measures against personal loan defaulters. “They have to pay compound interests and other expenses, including lawyer fees of lawyers in the event of a legal battle. But in Saudi Arabia, borrowers need to pay only the loan amount and its service charges,” he added.
Prominent Saudi financial and legal experts say the current practice of local banks receiving personal loan repayments directly from the salaries of borrowers is a clear legal aberration that is unacceptable.
Dr. Abdul Rahman Al-Sultan, an academic and economic expert, noted this practice serves as a motivation for local banks to extend more personal loans to employees without taking into account their solvency.
He urged concerned authorities to protect borrowers from the dangers and risks involving personal loans and not to allow banks to exploit them.
“Apparently, banks are able to solve all the problems related to personal loans following a directive by Saudi Arabian Monetary Agency (SAMA), the central bank, allowing them to treat the salaries of borrowers as security if they take out personal loans. This has helped banks to expand their base of personal lending substantially,” he said, adding that personal loans with salary collateral forms a major segment of banking credit in the Kingdom.
Speaking to Al-Eqtisadiah business daily, Al-Sultan said banks in any developed country in the world are not allowed to use the salary of individuals as security for personal loans.
“In those countries, banks must seek security sources other than salaries, which represents the source of the borrower’s livelihood and cannot be put in any risk. We see banks in advanced countries accept real estate as collateral to secure a real estate loan or vehicles to obtain a car loan,” he said.
According to Al-Sultan, SAMA’s directive to employers to issue letters to the concerned banks allowing the transfer of employees’ salaries for the repayment of their personal loans virtually serves as an incentive for banks to continue to promote such products.
Subsequently, this would become a big economic burden on employees. “Local banks deduct monthly installments for the personal loan from the salary of the employee before it reaches him.
He has to then budget the remainder to meet other expenses,” he said.
Al-Sultan pointed out that in the past Saudi banks adopted a more cautious approach when extending personal loans. “But now they compete with each other to give loans thanks to the SAMA directive with regard to salary collateral. Until 10 years ago, the total value of personal loans extended by Saudi local banks was less than SR10 billion. However, now the value has exceeded a whopping SR200 billion,” he said.
He noted that many citizens take loans after giving their salary as security to pay for things such as vacations abroad. “As a result of this, most citizens shoulder a heavy burden of personal loans. Therefore, they can draw only a portion of their monthly salary which is quite insufficient to meet their day to day necessities,” he pointed out.
Al-Sultan urged SAMA to review its decision. “SAMA should fulfill its responsibility to protect the interests of those who take out personal loans by scrapping the rule that salaries must be used as collateral. Instead, employees who have personal loans must be given full freedom to transfer their salary to any other bank they choose,” he said, while noting that nearly 70 percent of personal loans in the Kingdom are based on salary collateral whereas in the United States the collateral of about 80 percent of personal loans is real estate.
Fadl Albu Ainain, another economic expert, said banks in the Western countries rely fully on the credit ratings of personal loan applicants. “This is the criterion when taking a decision on whether to grant a loan or not. This shows the keenness of customers in those countries not to encounter any future troubles with regard to their credit ratings and thus they can ensure their solvency in order to take out a loan any time in future,” he said. “However this credit awareness is not seen in the Saudi market. Here customers are not at all bothered about credit ratings, at least for the time being.”
Ainain hoped that there would be more focus on credit ratings in the Kingdom in future. “A borrower should be keen on the repayment of loans without reaching a stage of insolvency. When we reach such a level of solvency, then there would be no need to rely on transferring a portion of salaries to the bank to repay a loan,” he said.
Ainain warned about the prospect of a flourishing market for brokers and agents who approach insolvent beneficiaries with personal banking loans. “These agents would levy a commission of about 30 percent of the loan amount from their clients,” he said.
Nazeeh Mousa, a lawyer and legal consultant, said taking the salary of employees as collateral for loan repayment is the only option banks have to get their money back from the borrower. “Every bank is a joint stock company and they are accountable to their shareholders. Banks cannot be irresponsible, and therefore they need to ensure prompt repayment of loans by their clients,” he said.
Mousa noted that most international banks take punitive measures against personal loan defaulters. “They have to pay compound interests and other expenses, including lawyer fees of lawyers in the event of a legal battle. But in Saudi Arabia, borrowers need to pay only the loan amount and its service charges,” he added.
