Discuss about the Hidden cost in banking and financial services.
Banking field is very strong in UAE from both perspectives Capital & Assets. There are different type of banks in UAE and they were robust in case of any vary in economics. On the other hand, resignations number increased which led to shut many other banks.
In Dubai and Abu Dhabi they try to continually recruit individuals in order to enhance the UAE economy. That’s why the number of Banks in this city grows rapidly. To be more precise, there are two types of banks in UAE; Commercial and Representative. Currently, there are 48 Commercial & 7 Representative Banks distributed in all over UAE. The usual and major services that these banks provide are Personal Loans, Car Loans, Credit Cards, Corporate or business loans, corporate facilities & Fixed Deposits… act.https://emiratesdiary.com/uae-tips/list-of-banks-in-dubai-uae-abu-dhabi-uae#ixzz4XMIIF4D5
Dubai Islamic Bank (DIB) is one of the leading Islamic banks in UAE. They consider themselves “champions of morality, equality and transparency in everything” they do. They harmonize their goals with UAE evolution. As well as, they are strong competitor as their assets are more than 1 trillion US Dollar globally. https://www.dib.ae/about-dib/overview
One of the most wanted bank service is the personal loan. However, the people who request for such service usually end up with regression. The reason is banks customers usually ask about the rate and installments. However, some procedure requires’ service cost, monthly charges, postponing installment charges, and these are not clear for customers. This report will clarify these hidden charges. From my perspective, these charges and extra costs are somehow manipulation as the bank doesn’t take the responsibility to clarify it for personal loan customers.
According to Gebba, (2015) it is stated that banking and financial institutions in Dubai and Abu Dhabi have come long way from the time when charges and other processing fees charged were only processing fees and other stipulated payment. Now banks in UAE has developed its functioning in sophisticated way and increased hidden charges so that more clients be grabbed by not disclosing their actual cost of capital. Throughout the time there are several changes have been made by UAE monetary authority in its unreasonable high fees and services charges. UAE bank federation is the responsible authority in establishment of code of conduct for the UAE’ banking sectors so that it could build professional and transparent business environment to serve customer’s interest and their right (Paltrinieri, 2015).
As per the views of Wanke, Azad, Barros, & Hassan, (2016) it is stated that The central banks of UAE as a part of its commitment to promote economic and financial stability has actively engaged in foster financial system by providing efficient central banking services. However, with the increasing ramification of business changes, banks and financial institution are introducing several charges and hidden expenses which are charged by banks from the general public in their banking services. These hidden charges and expenses have become new ways for banks and financial intuitions to make money in determined approach.
At the time of taking loans from the banks borrower tend to neglect several hidden charges. However, interest rate and tenure time of loan amount are the basic tools which are used by borrowers while taking loan from the banks and financial institutions. There are other hidden charges which are put under the carpet by banks. Moreover, website and other portals of banks in UAE do not disclose the details of these hidden charges.
According to Button & Gee, (2013) it is stated that there are following charges given below that are charged by banks and financial institutions in UAE in Dubai.
Service fees
These fees are the charges which banks and financial institutions in Dubai charges for their banking activities. it is further observed that even if banks gives guides regarding the services fees on its website but it is hard to spot the actual amount which would be charged by banks and financial institutions for their services. Some time these hidden service charges vary with changes in transaction in determined approach. (Al-Ali, (2008).
Conversion fees
Campello, Gao, Qiu, & Zhang, (2015 provides that it is the amount of fees which is required to be paid by customers for reducing rate of interest during loan tenure. For instance, if a client has taken loan @ 14% e.g. 12% basic rate and 2 % mark up rate. Then in the later time bank revised its mark up rate to .25%. In this case clients will revise their bank rate or mark up rate from 2% to .25% and has to pay conversion fees to banks.
MODT charges
According to Goddard, Molyneux, & Williams, (2014) it is depicted that these are the charges which are required to be paid by clients while submitting their documents with the banks in order to create charge on their assets for their loan amount. However, in Dubai, it is called memorandum of deposit of title deed which vary from .1% TO 0.2% of the loan amount.
Personal loan fees
As stated by Al-Tamimi & Hussein, (2010) it is stated that it is charges which vary with the doubtfulness of repayment of loan amount. As in the case, if clients are making payment for their online shopping or e- payment then banks would charge additional expenses as overdraft rate apart from its banks rate. These fees are hidden and vary with the unsecured amount of client in his transaction. It includes e.g. credit card loan amount fees, online payment fees, and fees for placing orders on the behalf of clients.
Pre closure charges
As per the views of Al-Marri, Moneim, Baheeg Ahmed, & Zairi, (2007) it is stated that these charges are completely hidden and could be identified at the time of happening of event. For instance If a customer in banks and financial institutions in UAE want to apply for pre closure then bank would charge additional interest at the certain rate on the outstanding principle amount as pre closure charge.
EMI bounce charges
As stated by Goddard, Molyneux, & Williams, (2014). It is divulged that these are the charges which will be levied on clients if he failed to make installment amount of loan in stipulated time period. Ideally these charges include EMI bounce amount, services charges, penalty and other taxes levied on the same. This cost aroused when borrowers make default in payment of his EMI for borrowed amount.
Retrieved charges
These are the charges which are to be paid by clients at the time of closure of loan amount. It is ideally charges which are related with satisfaction of loan amount. These charges are collected by banks from the clients at the time of satisfaction of their loan amount. however, these charges could be avoided by banks if bank has entered into agreement with the borrowers to not to charge retrieved cost.
Administrative charges
As per the views of Campello, Gao, Qiu, & Zhang, (2015) provide that there are two charges which are charged by bank administrative charges, processing charges. Ideally banks in the starting of providing loan to client do not disclose but it is deemed that clients would be ready to pay off all their document handling and other processing fees. However, waving of processing fees could be made by banks if clients and banks are satisfied at the same terms and conditions.
Legal fees
According to (Ariff, Lewis, & Mohamad, (2014). It is depicted that Banks in UAE before providing loans amount to customers indulge in preparing search report of client’s property. Search report reflects all the property details of clients so that proper valuation could be made for the loan amount based on the assets charged by banks. This legal fee is charged by banks from the clients without any prior intimation.
Switching loan package
In case if clients have made application of fixed loan amount and now they want to switch their loan amount as floating loan amount then bank and financial institutions in UAE will be charging switching loan charges from clients. These cost arises when borrowers want to make changes in his existing loan amount.
Recovery charges
It is the charges which are required to be paid by customers in case if he made default in payment of loan amount. These charges based on the expenses made by banks on the recovery of their loan amount.
Late payment charges
It is stated by Hassan, (2014) that these charges are emerged due to delay in EMI payment by the clients. Ideally in UAE banks and financial institutions charges 2% additional interest as penalty amount on the amount due.
Prepayment loan fees
It is the amount of charges which aroused as client makes payment of loan amount before loan tenure. In this case, clients in order to close their account have to certain amount of money to banks so that their account could be settled down in determined approach.
Getting list of documents
As stated by Ariff, Lewis, & Mohamad, (2014) it is depicted that charges which are imposed on the clients if he asks for certain documents and of the details from the banks. For instance, if a person has taken loan from banks and financial institution in UAE by then he could ask for the copy of current documents of his assets then for these banks charges certain amount for its services from the clients.
Forcing borrower to buy expensive insurance products
In this case banks and financial intuitions force their borrowers to take certain insurance products by dictating them that it is covered in their banking policies. However, these are the amount which banks use to earn as a commission on the sale of these insurance products.
Charging money on credit card
Banks and financial institutions charge certain amount of rate from the borrowers if they cross primary limit of their credit card. However, these charges are collected by banks either monthly, quarterly and on yearly basis.
Documents retrieval charges
On the application of loan, borrowers submit important documents to banks and financial institutions. Then Commercial and Representative Banks deposit these documents in their central storage units to assure safety. In the end of full payment by the borrower’s banks charges a certain amount from borrowers for transferring these documents from the repository to borrowers.
As per the views of Miles, Yang, & Marcheggiano, (2013) it is given that with the increasing competitions and strategically working system of several banks in UAE it has become mandatory to reduce cost of capital for clients. Persons who want to take loan are ideally interested in taking loan from the banks which are providing loan at very low interest rate and with long tenure loan. Banks and financial institutions in UAE are more concerned about increasing their customers and spreading liquid money in the Dubai and Abu Dhabi at large. However, in order to increase their bank loan amount in general public all the banks have to hide their certain charges otherwise all the customers who want to take loan will go somewhere other place for the loan amount. There are other several charges which would not emerge if borrowers do not attempt to do these activities. In addition, banks and financial institutions in UAE work on the strategy of providing the best services to clients. Therefore, it is observed that there would be several hidden charges which are paid by borrowers if they avail banking services from banks and makes default in same.
As per the views of Lagoarde-Segot, (2016) it is divulged that there are several services which banks and financial institutions provides to their clients at free of cost such as mobile banking, online installment payment, availability of credit card, support services to help borrowers to counter their queries, life insurance of borrowers, making payment on the behalf of clients orders and round the clock banking at several places including airports, and hospitals.
As stated by Paltrinieri, (2015) it is given that UAE has strong competitive baking sectors accompanied with various banks providing banking and financial services in determined manner. It not only has largest banking sector amongst all the Arab states but as well boast of top two of Arab economy. Currently UAE has around 140 foreign exchange firms and 25 investment firms. However, all the commercial banks and other financial institutions are subject to rules and regulation given by central bank of UAE. It is observed that all the banks have developed their financial products to the extent which could satisfy client needs and demand in sophisticated manner. There are two ways which are used by banks in UAE to attract clients keeping rate of interest as low as it could and keeping banks charges less. Therefore, these are the two factors which results into emergence of hidden charges for the borrowers in later time.
As per the perception of Boot, & Ratnovski, (2016).There is several hidden charges and fees which are charged by banks from the borrowers. It is observed that borrowers are divulged a complete schedule of notes of charges which would be charged by banks from borrowers. However, due to high complexity it is hard for borrowers to estimate the total amount of hidden charges. In this case borrowers feel that banks are taking advantage of them which results into increment in their cost of borrowed money taken from banks. Moreover, some time banks and financial institutions apart from taking extra money for their services also indulge in imposing penalties and other fines on borrowers due to failure of payment of some installment.
Banks and financial institutions in UAE has to face failure of transparency in their banking and financial services. Hidden charges and other additional cost imposed by banks on borrowers result into less transparency in their banking and financial services. Nonetheless, these charges are uncertain which could only be identified on the happening of certain events. It is further observed that in order to increase the transparency all the banks should divulge all the terms and conditions while lending money to borrowers.
According to (Hassan, (2014) it is stated that there are several measures which could be implemented by banks and financial institutions in banking and financial sectors such as all banks could indulge in following standardized rules and regulation which would assist borrowers to understand banking system in very easy and determined approach. It is further observed that banking sectors should indulge in following international policies of transparency in order to win the trust of clients in determined approach.
As per the views of Button & Gee, (2013) it is depicted that Banks and finical sectors are indulge in providing banking and financial services such as lending money, deposit of money, other banking services. Banks and financial intuitions need to consider all the cost of capital before lending money to borrowers. However, there are several banks which compensate their cost of capital money by charging hidden cost on borrowers. Therefore it could be inferred that hidden charges are completely based on borrowers act. If borrowers make default in making payment of borrowed amount then there will be emergence of hidden cost. However, banks and financial institutions should make complete disclosure of all the terms and condition while lending money to borrowers.
Conclusion:
In this report various facts and figures have been collected which depicts that banks and financial institutions viability in their business functioning in UAE. However, banks in UAE are trying to reduce their hidden cost in their loans amount. Hidden rate is the rate which is not disclosed at time of granting loan to borrowers but charged in later due to occurring of some events. It is further observed that banks and financial institutions are complying with all the rules and regulation issued by center bank of UAE in their banking and financial services. However, it is true fact that all the borrowers are more concerned about taking loans from the banks at cheapest rate with high tenure. It is required by central authority of UAE to disclose all the charges and hidden information on their registered website so that all the clients could be kept vigilant. It could be inferred that if banks and financial institutions would made proper disclosure of all the relevant information including data regarding hidden cost then it would help borrowers to monotones of their confident in banking and finical services in UAE. It will result into less bad debts, timely payment and increment in client’s satisfaction in baking and financial services. It could be easily said that hidden charges in banking system of UAE are the major concern for the borrowers in raising loans from the banks and financial institutions. It is concluded that banks and financial institutions need to increase transparency in their banking and financial services in order to provide best quality services to borrowers in case of lending. Hidden costs are uncertain amount which is imposed due to some happening of events. It is up to borrowers to avoid this cost. If borrowers fail to make installment amount of borrowing money then it would be imperative that bank will impose hidden charges on borrowers. Now in the end it would be inferred that hidden cost which are required to be charged by banks and financial institutions. However, banks and financial institutions providing banking and financial services should make complete disclosure of their hidden cost at the time of providing loan to borrowers.
References
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