UAE: Loan Defaults Drop Drastically As Growing Economy Brings Stability In Job Market

The loan default rate among the UAE's top banks has halved in the post-pandemic years as the growing economy brings stability into the employment and overall non-oil sectors.

According to the“What's Behind the Surge in UAE Banks' Consumer Lending” report published by S&P Ratings, nonperforming loans (NPLs) for the 10 largest UAE banks improved to 3.0 per cent of their loan portfolios as of end-June 2025, down from the peak of 6.1 per cent at end-2020.

As of June 2025, total consumer loans in the country reached Dh540.9 billion, a significant 55 per cent increase from year-end 2021 levels, or an average annual growth rate of 13.6 per cent.

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Bad loan rates had spiked during the pandemic year of 2020 in the UAE as companies reduced workforce and many closed operations due to the Covid-19 restrictions.

During the same period, the cost of risk decreased to 40 bps from 169 bps.“We expect NPLs to remain broadly stable thanks to the supportive economic environment,” S&P analysts.

The UAE has grown exponentially in the post-pandemic period, including a massive growth of 7.9 per cent in 2022. This strong growth placed the UAE among the world's fastest-growing economies.

As the borrowing has been increasing over the years, household leverage in the UAE has risen consistently, exceeding nominal GDP growth over the past three years.

Household debt in the UAE as a percentage of GDP increased to 25.4 per cent in 2024 from 20.7 per cent in 2022, said S&P.

S&P said that demand for personal loans, mortgages, and auto loans will increase in the UAE in 2025 and 2026 as further interest rate cuts will make borrowing cheaper.

“From 2025 to 2026, we expect consumer credit to continue growing at 10 to 12 per cent annually. The likely additional reduction in interest rates will also support this growth. We think there will be two more 25 basis point (bp) rate cuts before the end of this year and another 50 bps of easing in 2026. The Central Bank of the UAE will mirror these cuts to preserve the peg between the US dollar and the dirham,” said S&P Global Ratings.

Most of the analysts now expect two further interest rate cuts this year, which will raise demand for credit in the UAE from individuals and corporates.

“The US Federal Reserve is easing into a resilient economy with inflation still above target, and two more cuts are expected this year,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

On September 17, the Central Bank of the UAE reduced the base rates applicable to the overnight deposit facility to 4.15 per cent from 4.4 per cent earlier. This decision was taken after the Fed cut interest rates by 25 basis points earlier.

The UAE has experienced robust economic performance over the past four years, led by oil and non-oil sectors and significant reforms to visa schemes by offering long-term visas that are not linked to employment.

As a result, the population has grown significantly to 11.2 million in 2024 from 9.6 million in 2021. This has contributed to the increasing demand for consumer credit, including mortgages, personal loans, auto loans, and credit cards.

The rapid adoption of digital lending platforms and reduced processing times has also fuelled growth.

S&P analysts expect this trend to persist over the next couple of years.

“Our expectation that GDP will expand by about 4.1 per cent on average in 2025 to 2027, primarily underpinned by non-oil activities,” said S&P.

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