Installment companies seek alternative loan guarantees

Installment companies warned against the lack of guarantees on loans, saying this is bound to raise interest rates on consumers.
They demanded that alternative guarantees on loans should be provided following the decision by the Ministry of Commerce to ban issuing checks for deferred payments, a local newspaper reported.
Meanwhile, banks refrain from deducting any payment from the monthly salary of the borrower, except one that charges 35 riyals for each transaction.
“The Saudi Arabian Monetary Agency, SAMA, prohibits banks from signing agreements with installment companies,” said Abdulaziz Al-Otaibi, a banker. He added that such transactions are considered financial and administrative violations.
He said that installment companies endure high risks against compounded interests. “People tend to make use of their services because banks refuse to extend loans or other financial facilities,” he argued.
Suggesting that installment markets provide financial solutions to customers wishing to buy home appliances or other gadgets, he said: “Some banks pay fines when violating lending codes because the size of profits earned is bigger than the fines incurred.”
Loans markets should be subject to new controls that protect the customer against defaults and illegal money and transactions by the companies that extend such loans.
Applauding the decision by the Ministry of Commerce to prohibit the issuance of deferred checks, Al-Otaibi said: “It is a move in the right direction to control the market and minimize exaggerations of loan transactions.”
Abdullah Elian, another banker, said that banks are not allowed to sign agreements to deduct payments following the aforementioned decision, adding: “There are a number of reasons for this, such as reducing interest rates and minimize cases of defaults.”
He stressed that extending loans from outside banks should be restricted because of its implications on both the economic and social levels.
The director of an installment company, Fahad Al-Muhammad, said that his company is complying with the ministry's decision. “We already have an agreement with a local bank for deduction transactions charging 35 riyals against each transaction,” he added.
“Installment companies are the ultimate solution to provide liquidity of less that SR 50,000,” he argued.
Warning against the poor guarantees to be provided in the wake of the decision, he said: “The companies will be compelled to raise interest rates to face any probable defaults.” He demanded enacting a regulation that allows deductions from all banks alike to limit defaults and manipulation.
“While competent agencies, including SAMA, did not come up with suitable new guarantees following the decision, this will inflict damages on borrowers,” said Salem Al-Luqman, the director of another installment company. “We shall be forced to raise interest rates to match the greater risks,” he concluded.