Personal Debt is Growing Throughout the Arab Gulf States - What Can Be Done?

While debt is highly discouraged in Islam (the concept of interest - known as riba - is forbidden), the Arab Gulf region is witnessing unprecedented levels of household debt.  A 2023 article published by the Abu Dhabi-based think tank Future for Advanced Research and Studies reveals that the total value of personal loans granted to individuals by central banks amounted to $303.2 billion, with Saudi Arabia  accounting for 30%, followed by the United Arab Emirates (29.3%),  Kuwait  (17.2%),  Qatar  (11.5%), Oman (8.5%), and Bahrain (3.6%).

The increase in the region’s household debt can be attributed to several factors, starting with a prevailing culture of overconsumption that encourages individuals and societies to consume beyond their needs. Retailers and financial institutions tend to push people towards incurring unnecessary debts through aggressive marketing campaigns. These induce consumers into buying houses, new cars, and all kinds of household items. Consumers also subscribe to multiple credit cards, which offer different benefits and repayment flexibility that quite often lead to an accumulation of debt that some fail to repay.     

The growth of Islamic banks has also opened the door for individuals who would typically never borrow from their conventional counterparts. They tend to believe that borrowing from Islamic banks is in keeping with their Islamic identity and addresses any Shariah reservations about loaning in principle. Islamic banks are, however, commercial institutions set up to make financial gains for shareholders and depositors. And while these banks use structurally different modes of financing, they nevertheless contribute to the creation of household debt.

It is also no secret that public knowledge of Shariah economic values is limited, with many unaware that debt is discouraged in Islam. Most people fail to appreciate the fact that transactions, despite being possibly valid from a Shariah perspective, remain abhorrent if they do not meet the overall Shariah objectives and values.

Islam’s position on debt

While incurring unnecessary debt is discouraged in Islam, it is not necessarily prohibited. If the debt comes with an increment over the principal (Riba), then it is prohibited for both the lender and borrower. If one is in a state of necessity, one can borrow with interest the amount that fulfills this necessity. The necessity in this context refers to securing basic shelter, food and other essential household items if the interest-bearing debt proves to be the only means of doing so. 

Accordingly, the whole concept of borrowing does not fit within Islamic economic theory. This stance stems from Shariah’s keenness to preserve the wealth of individuals and societies. Just as overspending exposes one’s wealth to waste, using others’ wealth also has the same effect. Defaulting on a debt is therefore a very serious issue in Islam. 

It is reported that the Prophet (ﷺ) said: "Whoever accepts other people's wealth intending to pay it back, Allah will pay it back for him. And whoever accepts it intending to waste it, Allah, the Most High, will waste (destroy) him." [Reported by al-Bukhari]. It has also been suggested that the Prophet (ﷺ) initially refrained from leading the Jazana (funeral) prayer for a person who passed away before repaying his debt. However, when one of his companions pledged to take care of the debt, the Prophet agreed to lead the prayer for the deceased debtor. The Prophet intended this stance to show that one should not incur debts before making sure and taking precautions that one can repay the debt.          

Tackling the problem

Since the prevalence of a consumption-focused culture renders any efforts to encourage a reduction in consumption, loaning, and spending habits meaningless, governments should intervene and regulate the financial sector more vigorously. They could take the important step of setting a reserved ratio of the debt one may incur to the net income of the individual. All types of credit cards could also be included in the same ratio.  

The question is whether the governments are willing and able to do so. The answer seems to relate to the extent to which regulators are independent from the financial industry and whether they see the increased household debt as a major warning sign.

Indeed, people will keep borrowing as long as they find those who are willing to lend to them, and banks, unless regulated appropriately, will keep loaning people using  depositors’ money. Accordingly, immediate intervention by  financial authorities and regulators is required to urgently address the unprecedented increase in personal debt. This should be accompanied by a long-term commitment to raise public awareness through proper Islamic education at schools and mosques.

Dr. Abdulazeem Abozaid is a Professor of Islamic Finance at Hamad Bin Khalifa University’s (HBKU) College of Islamic Studies.

The thoughts and views expressed are the author’s own and do not necessarily reflect an official University stance.