A nationwide credit bureau is urgently needed

A country-wide credit bureau would be useful in attacking the problems connected with the issue of over-enthusiastic borrowing and lending.

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Concerns about consumer credit have been generating a lot of creative thinking in the UAE. One well-established weapon against borrowing abuses - the credit bureau - should be established as quickly as possible.

Twice this year, presidential decrees have solved debt problems for many Emiratis. In January, a Dh2 billion fund was announced to pay the debts of thousands of Emiratis in default on loans under Dh1 million each; in May, another 368 nationals, with debts up to Dh5 million each, had a total of Dh568 million cleared.

Imprisoning debtors is clearly counterproductive - how can they earn money to pay while behind bars? Up to a point, debtors' prison might spur prisoners' relatives to pay, but on balance the long-awaited bankruptcy law, focused on repayments instead of prison, promises to be a great improvement.

The government's payment of debts, although welcome and humane, runs the risk of becoming a moral hazard by creating an incentive for irresponsible borrowing. The saving grace is that those who use the plan must repay the fund and can't borrow again until debts are cleared.

It is also a reminder that too many people are getting too far into debt. For every prisoner, there are an unknown number of borrowers who can make their payments, but only at the cost of family hardship.

The banks have been vilified for offering excessive loans to people on moderate incomes, and now there is a plan to punish such practices. Central Bank Governor Sultan Al Suwaidi recently told members of the Federal National Council that a new consumers' rights law should establish fines for banks that lend to those who cannot afford to repay.

Making this work will be a challenge. Choking off excess credit while allowing the free flow of funds for prudent uses will be a delicate balancing act. Banks already have a disincentive to reckless lending: the risk of not being repaid. And banks are taking "haircuts" of up to 50 per cent on loans covered by this year's repayment decrees.

The new regulations should be complemented by a UAE-wide credit bureau that would help the banks to make better decisions. Banks in many countries have shared central registries of borrowers: someone with loans from banks A and B would be turned down if he tried to borrow from bank C as well. It's a simple way to keep people from getting in over their heads.

Dubai has a credit bureau, Emcredit. Plans for a nationwide version have been in the works since 2010, but are still not complete. A bankruptcy law and a credit bureau would be two long steps towards curbing the problems associated with excessive borrowing.