LENDERS IN FOCUS

Now its time to take a deeper dive into why lenders are perceived the way they are. Couple of things to consider, however, is the following:

• Lets look into how rates and fees are structured. To remain profitable, lenders tend to add a premium on top of Intra Bank Rates + Fees. Thus, rates tend to fluctuate depending on competitive market forces (if my competition is charging X I will charge X or Y), intra-bank rate increase or decrease, risk profile of the client, department overheads, and an institution's appetite to lend.  Another important factor is sales targets and management fiscal controls to ensure maximum returns to shareholders. For example, if a sales team is not reaching their target in a given month, they will be targeting to price products and loans on the high end of the pricing grid. 

• Banking employees in retail and commercial lending departments, which i usually refer to as carpet sellers, lack the required knowledge and skills of what they sell and how to sell. From 2006 - till date, I am seeing banking staff selling credit cards in the streets. Generally approaching anyone with a fake smile, rehearsed script, and an application. I got the chance to speak with couple of these poor dwellers, who mentioned to me that they don't get a salary from the financial institution they worked with, where their compensation is purely commission based. When I asked about qualifications, they mentioned high school degree from bangalore, another a B.S in IT from India, etc... without any formal banking related training or qualification. I personally find this to be very sad, and that banking is at its lowest now from an ethical and prestige point of view. Where did the old days go, when bankers where very highly regarded and respected in their community !!!! Wait a minute, are current bankers ... sorry "carpet sellers" from the community !!!  Who are these people and can I trust them to give me a lending advise !!!! Unfortunately, the retail segment within the UAE or region tend to focus on quantity not quality. This is in terms of employees and products. On the one hand, financial institutions tend to capture the maximum market share, so they tend to open allot of branches. To fill these branches, they try to hire sales forces (irrelevant of the experience) in order to achieve targets and to ensure that these branches are profitable. Not only experience is affected, but also the quality of employees where hiring became based on reduction of costs. This also resulted into lower customer service quality. 

• The retail or commercial lending segment lack product structuring capabilities and creativity, making products the same with very few added value differentiators that are mainly marketing related (win points, free i-pad, decoration voucher, etc...). 

I tried my best to summarize some factors that needs to be considered which - I believe, add to the perception of why lenders are perceived to be evil. The above factors are interdependent and I believe needs to be looked at in more depth, which I might be elaborating further on each factor in my future book or in other articles. 

Now, before jumping into solutions and conclusions..., it is important to throw in couple of economic terms to complicate things abit. Everything being equal, the lending sector is a competitive market, which makes it a price taker - not maker. Unfortunately, lenders and current central bank regulations makes lenders a price maker. Interesting.... so, consumers can impact pricing ? The answer is yes, but it depends !!

It depends on elasticity of demand and the number of consumers knowledgable enough to understand and actually reject lending institutions being a price maker. Consumers should also be able to understand and debate central bank regulations (although very protective), it doesn't mean its in the best interest of consumers. For example, when the central bank decided to cap DSR limits and minimum down payment required for a mortgage or car, it didn't consult with consumers...it only consulted with financial institutions !!! I know that it's not meant to be this way, but again this ties up into best practices, which I doubt is being implemented from a regulatory level.

So, lets now go back into the deeper dive in consideration to the above. Why are banks perceived to be "Evil" or "Haram".

• The above factors made financial institutions arrive to peak pricing prior to the crises. Loans where marketed like chocolate - enticing mainly the most credit worthy segment in the UAE - UAE Nationals. Sell...Sell...Sell was the means, and profit was the end. I am talking about both "Conventional" and so called "Islamic" institutions alike. "Islamic" institutions discussion is  altogether which I intent to cover separately.    

• These practices negatively impacted the community. Not only where respected UAE Nationals jailed, but also residents. Others who sustained, are still paying into the debt principal until this day, and even for the next couple of years. 

• Regulators took a very reactive approach, which I personally still don't believe is in the best interest of consumers. 

• The rule of law only protected financial institutions, and in 2010 or 2011 a decree was issued to ban jailing individuals over bounced cheques that were given against loans. Unfortunately late... but late is better than never...right !!! Thankfully we have an amazing government and leadership that came to the rescue by dedicating a sizable budget to bail out  UAE National. However, the management and executives who created the parameters and shortlist qualifications where shortsighted as they mainly focused their efforts on the low income and lazy segment of UAE Nationals. This is another case study that I will cover separately at a later stage.

I believe given the above, any educated or non educated person would perceive banks as "Evil." However, from my point of view - I see things in grey not in black or white. Adding to the above, I would argue that bad governance, leadership, and management resulted in this perception. 

If you noticed, so far the discussion was about the employees and their qualities, I also highlighted some setbacks from regulations. But lets not fault the laborers or soldiers. What about the elite sitting at the top (board- level and C-level). When the crises happened, I didn't hear about boards being restructured, or a CEO made redundant. Only the poor employees were made redundant by the dozens. Wouldn't you agree !!! 

Now that the above covers the factors that made us perceive lenders as "Evil" or "Haram." The next posts would be to evaluate what are Lenders doing right now to fix this perception and what can they do better. Followed by a post for consumers to follow in order to make better choices. I will also be adding some resources and links that are useful for consumers.