For years, it has been argued that one of the reasons why impoverished consumers turn to payday loans to cover their rent, repairs or bills is because they don’t have access to products and credit offered by conventional financial institutions. Many consumers don’t have bank accounts, and other consumers can’t receive enough credit to cover basic expenses.
Officials and consumer groups have often encouraged banks to start providing an array of short-term credit options to customers. Financial institutions and credit unions refrain from offering payday loans to customers. Due to costs and high risks, a payday loan isn’t something that banks, at least in North America and Europe, don’t want to get involved in.
But banks in the United States, Canada or Great Britain may soon enter that market, whether through government mandates or market forces. Besides, United Arab Emirates (UAE) banks are already doing it, which may prompt other jurisdictions to embrace the same business model.
When you need a small personal loans and you have a financial emergency, UAE financial institutions are giving their customers payday loans when they’re in pecuniary destitute, according to a new report from Emirates 24/7.
Dubai Islamic Bank, RAKBank and ADCB Islamic Banking are just some of the banks marketing this product to customers who have their salaries deposited regularly into the bank. With small personal loans more commonplace in the UAE today, banks decided to embark upon this trend and see if they could add to their bottom line.
“Even though the advance salary facility is available every month, salaried customers who avail the facility have to return the full amount at the end of the month,” says the bank’s official page.
How does it work? Customers have their salaries transferred to the bank partaking in this program and can take out an advance or a loan and withdraw up to 90 percent of their monthly salary. It’s very expensive, though. It costs Dh295 ($80) for every transaction for salaries up to Dh13,500 ($3,675) and Dh500 ($136) for salaries up to Dh30,000 ($8,167).
The funds are fully recovered by the bank when their paychecks are deposited back into the account by the end of the month. And, ostensibly, banks are aggressively marketing this product.
“I have been regularly receiving SMS messages inquiring whether I am interested in taking my salary in advance from my bank account with a note that said terms and conditions apply. Since I did not know the terms and conditions, I did not opt for it, but some of my friends have availed this facility,” an Islamic bank customer told the website.
UAE banks may have come up with a solution to the common concern that North American and European banks regularly have: an ability to retrieve the funds in a short period of time.
Since customers are taking out these next generation of payday loans from the banks directly, the financial institutions can recover these funds when the paychecks are deposited directly into those customers’ accounts within the next 30 days.