A few months ago, the government, necessitated by the falling price of oil, began a series of cutbacks in spending. These included shelving some major projects with projected costs in the billions, reviewing financial returns on existing and committed projects and reducing certain benefits and allowances from the paychecks of the sizable number of state employees. This week, benefits and allowances to government workers who make up a large part of the Kingdom employees were restored. Naturally the news was received with a great sense of relief by many families unaccustomed to the pinch of rising costs all around them. The lessons learned by some Saudis during the lean months have taught them that living a wasteful lifestyle cannot be maintained in the current economic climate. Some have reacted sensibly, doing away with much of their previous carefree spending habits. Others have tightened their belts considerably. But there were still many others who found themselves lost and bewildered in the face of such changes. A few months ago, in a study conducted by the Riyali Financial Literacy Group in collaboration with Souqalmal, the leading financial comparison site in the Middle East with operations in Saudi Arabia, Kuwait and the UAE, 86 percent of the Saudis responding admitted that they were suffering from one form or the other of "financial distress". Most of the financial commitments that the participants failed to fulfill were finance installments (44 percent), followed by borrowing from friends and family (34 percent), and then credit card payments (22 percent). Such a high percentage of failure to fulfill debt obligations usually has several consequences, including a bad credit history that affects the borrowers' ability to receive other financing. The survey also revealed another potentially perilous financial issue and that is the "debt to income (DTI) ratio". For those unfamiliar with the term, the debt-to-income ratio is all one's monthly debt payments divided by one's gross monthly income. As a benchmark, most financial analysts agree that a 43 percent DTI ratio is the highest ratio a borrower can have without being snowed under and defaulting on his financial commitments. This ratio is a major factor in determining the eligibility of an individual to receive finance in order to avoid burdening customers with debts beyond their monthly repayment ability. In more than 40 percent of participants in the survey, debts exceeded 60 percent of their monthly salary leaving the respondent and his family with less than half his monthly earnings to live on. This is not a comfortable situation to be in and without external intervention and financial infusion, an individual would soon find himself running out of funds, or to put it simply, robbing Peter to pay Paul as he goes about using a newly acquired credit card to pay off old debts, with the cycle never ceasing to end. The Saudi Monetary Agency (SAMA) has set the limit at 33 percent for the monthly debt burden that a customer can afford, to be able to successfully pay off debts. The debt burden ratio might vary from one customer to another based on the financial products held. SAMA also recently reported that "the appropriations allocated for covering bad debts exceeded 165 percent of total non-performing loans". Speaking for the holding group that sanctioned the study, a spokesman said: "We have provided a wealth of financial awareness courses and tools to help individuals act responsibly with respect to borrowing and credit history, in addition to saving and planning for investment. The optimal method of personal financial management requires self-consciousness and the individual's desire to develop financial awareness." Souqalmal also committed their organization to assist debt-ridden consumers in comparing the financial products offered by local banks, and applying for loan plans that best meet their needs. "This contributes toward increasing the level of financial awareness of individuals and helps in bringing a level of transparency to the marketplace," the organization added. With a semblance of past riches returning to them, many families should be cautioned to apply restraint in their carefree spending habits. While the Kingdom is weaning itself from dependency on oil, the road is fraught with reservations that may require further stringent actions down the road. The author can be reached at [email protected]. Follow him on Twitter @talmaeena
