Al Etihad Credit Bureau (AECB) launched a credit scoring system today, which could signal the end of blanket high credit card rates in the UAE.
Credit scoring, common in mature markets, is a three-digit number assigned to each borrower – in the UAE’s case between 300 and 900 – that represents their creditworthiness and future risk of default. The higher the number, the lower the risk.
The bureau hopes the new system will result in borrowers with good payment histories receiving better rates when applying for a credit card or loan.
“What we would like to see going forward, just like any other developed market, is if you have a good credit history and that is reflected in your score, you should not be charged the same interest rates or profit rates because you are part of a pool,” said Marwan Ahmad Lutfi, the chief executive of AECB.
“We want to make sure those who are good payers get rewarded and those who might not be very disciplined when it comes to payment behaviours will start realigning themselves.”
According to the financial comparison site Souqalmal.com, the average interest rate on UAE credit cards is about 40 per cent per annum.
Gaurav Bhalla, the founder and chief executive of debt advisory company Lotus Loans and Rescheduling Services, said UAE interest rates on unsecured debts are high because of the transient nature of the workforce. Expats who lose their jobs often leave, he said, rather than risk bouncing a cheque – a criminal offence – which leaves lenders reluctant to lower rates.
While credit scoring may reduce interest, it could take time, he said: “Banks may want to hold on to see how the market matures and then take that impact from there on the balance sheet.”
As well as negotiating power on interest rates, AECB says the scores will help residents secure lower insurance premiums, better payment terms with landlords and enhanced benefits with telecommunications and utility companies.
Credit scores are available from today for individuals, establishments or corporates in the UAE. A standard credit report for individuals or establishments costs Dh100, while the document with a score is an additional Dh50. A credit score only, with no report, for an individual costs Dh60. Standard reports for corporates cost Dh180, or with a score for Dh220.
Previously, UAE credit reports listed personal identity information and any liabilities, along with a payment history and any defaults, including bounced cheques.
Credit scoring is a natural progression for the bureau, said Mr Lutfi, and part of the organisation’s drive to “adopt international standards in credit reporting”.
“From gathering and aggregating data for over four years on borrowers in the UAE, we were able to move into what we call a correlation phase,” he said.
“Now that we have data we can start building correlations and creating tools that can help identify and predict some of the behaviour in the market.”
The score is calculated using a proprietary algorithm owned by the bureau, which takes into account about 2,000 attributes to determine a borrower’s risk of default over the next 12 months. Attributes include nationality, age, outstanding balances and the number of loans, said Mr Lutfi.
“Then when you put them in a matrix and multiply each one by another factor, you can look at several thousands of attributes. We narrow it down to see what the attributes are that make an impact on whether this person, individual or company is going to possibly miss a payment in the future,” said Mr Lutfi. “And you can slowly statistically refine that down to maybe around 50 or so attributes. Then we assign weights to them, specifically.” The model will be reviewed every six months.
Those with poor credit histories may be concerned about how the new rating system will affect them.
British expatriate Derek, who did not want to reveal his full name, bounced a Dh155,000 cheque guaranteeing a private loan for his former business partner who failed to pay it back. He was taken to court and found guilty.
While the father of two realises his credit score will be low, he said it will incentivise him to make payments on time. “You are definitely going to be thinking more about how you don’t want to affect your credit score and asking can I afford that?”
AECB, which first issued reports in 2014, said 59 financial institutions and telecommunications companies have provided credit data so far and 64 institutions have subscribed to its credit reporting services.
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