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The GCC debt trap, brought to you by falling oil prices and the kafala system

On March 14, 2016
In the Gulf, an inaccurate but telling distinction is often made between expatriates and migrants. Asian employees in lower-income jobs are referred to as migrant workers, while those in higher income jobs are referred to as expatriates. Regardless of lexicon, they are all governed by the same set of repressive sponsorship (Kafala) laws. For the purpose of this story, we use ‘expats’ and ‘migrant workers’ interchangeably.

As the region’s economic climate looks bleak with falling oil prices, companies are taking drastic cost-cutting measures. In Qatar, thousands have been laid-off,  and some have been rehired at half or a third of their original salary.

Several of those laid off are now trapped in the country, unable to pay off debts and because of the Kafala, unable to to seek another job to help pay these debts off.

These are key issues of abuse under the current sponsorship system (kafala) of labor migration management:

  • Once terminated, workers still need a No Objection Certificate (‘NOC’) from their current sponsor to be able to change jobs. This is regardless of whether they worked with the company for a year or twenty.
  • An ‘NOC’ still does not guarantee a job change. spoke to some expats in debt who received an NOC, but were not given clearance from the Ministry of Interior to process a new work visa.
  • Without a job and income, workers will not be able to repay the debt, which means they are likely to jailed unless they have enough resources to help repay the loan.
  • Workers who do not receive an exit permit and are stranded, many becoming destitute and desperate. In just the first two months of 2016 nine Indian expatriates who were unable to resolve their debts committed suicide.
  • In one large public sector corporation, workers were laid off, and offered to be re-recruited at salaries half or a third of what they originally received. This is in effect a form of contract substitution, where a worker’s vulnerability is exploited and they are forced to take up jobs at a much lower offer than that they were recruited for.

Countries like Qatar are small retail markets for financial institutions.

The population stands at 2.2 million, two-thirds of whom are lower income migrant workers, and who were effectively ruled out of any retail interests until the Wage Protection System (WPS) system was introduced in 2015. (Banks charge companies QR10 per month per employee as processing fee.)

So the retail market that covers less than 400,000 individuals has 19 banks in the fray. There are 9 national banks, 3 regional banks and 5 International banks in both conventional and Islamic finance.

Domestic savings is low and borrowing is made easy for the banks to sustain themselves. A recent Reuters report highlights that even nationals find themselves in debt, due to the permissive financial environment.

"...government should more strictly regulate the banks, for which personal loans remain a lucrative business, and help launch more share offerings to encourage citizens to enjoy long-term benefits such as bonus issues and regular dividends."

Easy Credit

Consequently, getting a bank loan or a credit card is quite easy in a country like Qatar (and in the UAE, as the real estate crash of 2009 demonstrated).

These are the terms of credit with most local banks:

A minimum salary of QR5000 is required to avail of a loan or credit card. You can get up to 10 times your basic salary as a loan. With a personal loan limit of QR400,000 for migrants (‘expats’).

The limit on a credit card is twice the salary. For nationals the limits are higher, the details of which are not relevant to this story.

Banks categorize their borrowers/clients based on the company that sponsors them. There are three tiers.

Tier 1 people get only a credit card, Tier 2 can have access to credit card and vehicle loan, Tier 3 will have access to credit Card, vehicle loan and personal loan. For each tier, the bank has a different level of offering, which also determines the size of the loan.The most reputed and stable companies fall into Tier 3.

These are also some of the companies that have had large scale layoffsQatar Petroleum, RasGas, Qatar Foundation, Sidra, Hamad Medical Corporation are all tier 3 companies that have laid off several thousands of expatriate employees between them.

While migrants are indispensable to sustaining nearly all sectors [...] the Kafala guarantees their disposability, structuring insecurity and vulnerability into the lives of virtually any expatriate.

Loan default

Before 2008, loans were given against an individual guarantor. Banks changed the rules, eliminated guarantors and introduced the ‘salary certificate’. The borrower needs to bring a letter from their employer stating their salary and agreeing to deposit the employee’s end of service benefits directly into the bank  should the borrower lose their job. The employer also clearly states that they are not responsible for any repayment of loans.

When a person loses their job or resigns, the company informs the bank and the bank immediately freezes the account. Most companies inform the employee before sending that letter to the bank. But there have been cases where the employee only becomes aware of the termination when the accounts are frozen.

Then the final settlement cheque goes into the bank. The bank tries to recover whatever is owed, If the amount is insufficient, then the bank contacts the employee and attempts to make a plan to recover, failing which they proceed with legal procedures. If the employee is not leaving the country but finds a new employer – then the employee has to make an arrangement with the bank to accept a new set of documents from the new employer. The account is made operational again only after the first salary from the new employer is transferred to the account.

Jail term

People are jailed if their end of service benefits don’t cover the outstanding loan and if they have no alternate means to settle the debt.

However, nowhere in the contract with the bank is the possibility of jail time mentioned. All that is mentioned is that ‘legal procedures’ will be followed.

The maximum jail time for loans of up to a million riyals is three months.

Different banks have different processes; Some file a case when a cheque bounces or if the borrower has failed to provide a plan.

The claimant (bank) has to file a case again and the prison sentence is extended for another 3 months. Then the claimant has the right to acquire your belongings. The court will auction it off and pay the proceeds to the claimant. However, most expatriates keep little in terms of assets in the country.

Only once the court is convinced that you have no more money then you are released.

But in the case of recent layoffs at the Hamad Medical Corporation, where expats had their account with the Qatar National Bank, they were jailed even before the final settlement was transferred to the account.

Employees of HMC told that the process of calculating final settlement and transferring the dues can take several weeks from the time of resignation or termination.

What Insurance?

Banks do offer an insurance on credit card, where each month the card holder pays a nominal fee. If the person loses their job, the credit card would be settled through that insurance. But his insurance does not extend to loans. Some banks are also reconsidering the ‘individual guarantor’ system to minimize jail terms. The other solution is conservative borrowing, and asset backed borrowing on the part of the customer.

The current economic environment highlights one driving logic behind the Kafala’s longevity: at the expense of rights, Gulf states deliberately maintain the temporariness of its ‘guest’ workers to cushion economic crisis. While migrants are indispensable to sustaining nearly all sectors – from hospitality, to retail, and banking – the Kafala guarantees their disposability, structuring insecurity and vulnerability into the lives of virtually any expatriate.