Choices for tailored lending in the UAE

The arrival of a new federal credit bureau this year means that banks can tailor-make loans and offer credit based on a customer's payment history. This also means lower interest rates can be negotiated.

Lee McGorie / The National

When a consumer signs up for a new loan or credit card, a bank carries out a series of checks.

It wants to know the customer's salary, see several months' worth of bank statements and have access to their passport, residency visa and more.

It will then ask if the customer has any other credit cards or personal loans. Sadly, consumers are not always honest and there is currently only so much the banks can do to check up on them.

However, this is all about to change.

The Ministry of Finance is rolling out a new federal credit bureau this year that will have access to all clients' financial data, providing banks with a much clearer picture of an individual's payment records.

"Today, banks are still very limited in what information they can get on customers' personal finances," says Paula Wehbeh, the chief operating officer of Souqalmal.com, the Middle East's leading price comparison website.

"It means rather than ploughing through your statements to look for trends - such as a debit of Dh2,000 every month around the same time - they can see a customer's payment history instantly."

While a fully-fledged monitoring system will overhaul the consumer borrowing industry, consumers need to be on their guard.

Until now, any missed payments or bounced cheques would have placed them on the Central Bank's "watch-list", their name coming off the list once their payment record improved. But with the new bureau delving back up to two years for those of good behaviour - and up to five for those with a poor record - those black marks from the past may come back to haunt borrowers.

As a result, the Ministry of Finance is advising bank customers to check whether new credit reports present a correct picture of their indebtedness.

With Al Etihad Credit Bureau due to begin a pilot programme with 12 banks in July, it plans to make reports available to bank customers by the end of September.

This will allow any individual to see what information the banking sector has stored regarding their personal finances.

The onus will be on individuals to ensure the data is correct, says Younis Al Khoori, the undersecretary at the Ministry of Finance and vice chairman of Al Etihad Credit Bureau.

"Most of the corrections will be on the borrower himself," he says. "Overall, the company won't have any responsibility to verify the data received from the banking sector."

It is certainly worth checking. Even those with an impeccable record might be caught out by a bank's administrative error.

"One slip of the keyboard could cause major problems if not rectified," says Keren Bobker, the On Your Side columnist for The National.

However, Al Etihad Credit Bureau will feature a dispute mechanism allowing consumers to alter their records if their credit record does not reflect a payment that they can prove was made on time.

To ensure proof of identity, it will initially be necessary for customers to visit the bureau's service centre in Dubai, with online credit reporting expected to follow later.

It has not yet been determined how much it will cost to procure reports; in the UK, for example, the service is available for £2 (Dh11).

Full credit scoring, a system found elsewhere in the world - where a person's payment history, including their ability to pay utility bills, bankruptcy applications and electoral status is assessed and an appropriate rating awarded - is expected to be available from next year.

"A strong credit bureau will expand credit opportunities for diligent customers, entrepreneurs and small business employees, as their strong credit track record could substitute the need for additional documents, reduce paperwork and provide a better customer experience," says Rick Crossman, the head of retail banking and wealth management for the UAE at HSBC.

"It will help financial institutions and individuals make more informed and comprehensive strategies with regards to loan-related matters, which would reduce the risk of defaults and improve banks' credit ratios."

The big bonus for individuals with good credit scores is the potential for lower interest rates on borrowing.

The average annual rate of interest is 37.8 per cent on a UAE credit card, compared with an annual interest payment of 17.5 per cent on a credit card in the UK, where the adult population is fully covered by credit-scoring companies.

But other bankers worry that as the UAE lacks a personal bankruptcy law under which debts can be restructured, some banks will deem potential customers as too risky - especially if they have already borrowed heavily to fund a business or support a certain lifestyle - leaving some to become shut off from the financial system.

Amending the UAE's long-delayed corporate bankruptcy could be one way of addressing this issue, Mr Al Khoori says. "Maybe we can link this in a few months, once we have finalised the proposed bankruptcy law. We're still at a draft version and we're just finalising with the local government."

In addition, the Central Bank prohibits debt service payments from exceeding 50 per cent of an individual's monthly income.

However, without full oversight of a customer's borrowings, this limit has been impossible to enforce for customers whose debts are split across multiple banks - a practice the new system will help to stamp out.

"Banks won't be giving credit to everyone and anyone - it will be more about 'can you pay me back?'" says Ms Wehbeh. "For customers who pay on time, it adds value. A customer can say, 'look at my credit history; now give me a better interest rate on my loan'.

"For the guys who do not have creditworthiness, well, they should not be borrowing anyway and the system will protect them from getting into debt."

The UAE's 51 licensed banks are expected to compete heavily for the best clients, who they will now be able to identify more easily through access to the new bureau's database.

"The long-term effect may even lead to more lenient actions by banks in the case of the odd missed payment for good reason," says Ms Bobker.

Ms Wehbeh adds: "Lending will be more personalised. Banks will know you as a person rather than just someone out there who works for x company. They will understand you have taken credit previously and have shown you are responsible enough to pay it back, allowing them to tailor any credit facilities they offer you."