Dubai: Banks are in the business of creating wealth for themselves and they stand to lose nothing when they lend, points out financial expert Amit Mithbawkar and author of Creating, Preserving and Distributing Wealth.
Explaining how loans work in favour of banks, Mithbawkar provides a small example to illustrate how your money is used for wealth generation.
“Let’s say person A deposits Dh100,000 in a bank account. According to the Liquidity Coverage Ratio (LCR) set by the Central bank of US and followed by Central Bank of UAE, a bank can lend up to 90 per cent of your money.
"So, let’s say person B approaches the bank for a car loan. The bank is able to extend him a loan of Dh90,000 from the amount deposited by person A. But no money exchanges hands and the bank hands over a cheque of that amount to Person B who then deposits it in another bank. The second bank now has Dh90,000 of which it lends up to 90 per cent of that amount to the next person. All the transactions are digital and actual cash does not exchange hands.
"There is a digital debt floating in the system on which banks earn interest. By the time the Dh100,000 is actually realised it has made more than 167 transactions going by the 90 per cent lending rule, creating nearly Dh900,000 in interest totally.”
The Central bank prints money only when real cash is realised.
So what banks are really doing is creating profit out of thin air, using your money and that is why people get up to five calls a day from different banks selling different loan products. It is all done in a regulated atmosphere and that is why it is acceptable and recognised.
In other words when people take personal, home or automobile loans the only real thing in the transaction is the actual asset that is pledged should they fail to pay the loan. What the bank provides is the IOU which is another piece of paper.
Mithbawkar cautions residents never to take any loan that is more than 20 per cent of their income.
When you get a salary, do not deposit all your savings in a bank. Instead diversify your portfolio and invest in bonds and stocks as well to reduce the risk on your savings.
A loan manager from a leading bank admits that as a sales representative of the bank he hard sells different loans to customers. “Banks and financial institutions in this area operate in a far more lax atmosphere here compared to Europe and the US where a customer has to approach a bank with all his documents for a loan. Here we are encouraged to aggressively call people on our data base and encourage them to take loans,”
When an individual with a loan suddenly loses his job and has more than one loan to repay, he finds himself caught in the debt trap. Most banks get customers to pledge their gratuity or end of service benefits and therefore are secure. They are aggressive about loan recovery with separate debt collection departments.
