Al Etihad Credit Bureau has started issuing consumer credit reports to banks and financial institutions that have subscribed to access its credit reporting system and submitted historical credit data.
The fledgling credit bureau, which should ultimately help banks to better regulate their lending risks and reward those who do not default on debts with better interest rates, said that the credit reports would include the debt obligations of customers and their payment behaviour patterns for the past two years.
“These reports will no doubt contribute positively to the banking sector, playing an important role in the assessment and management of credit and possible losses resulting from non-performing loans,” the bureau said. “Individuals will in turn be able to have a comprehensive overview of their current financial obligations and debt payment frequency and consistency over the past two years.”
It also said that bank customers would soon be able to request their credit reports through the bureau’s customer service centres in Abu Dhabi and Dubai.
A federal law was passed in 2010 to establish the bureau, which requires all banks to participate, but moves to create the institution have only been stepped up in recent months. The bureau did not say whether customers would be charged to get these reports, but a person familiar with the situation said there would likely be some fees involved.
The cost of financing in the UAE is hovering at lows of at least eight years. This has spurred a boom in borrowing and authorities are keen to prevent credit growth from spiralling out of control with such initiatives.
“The banks will know your full credit history, including outstanding loans and bill-paying behaviour over the last 24 months, so if you have a bad history, your access to credit could worsen, while if you have a good credit history it might be easier to get the required credit,” said Jaap Meijer, the sector head for financial services at the Dubai-based specialist emerging investment bank Arqaam Capital.
“Banks will start using this information very shortly to improve their lending standards, facilitating banks in screening and monitoring borrowers as well as avoiding giving loans to high-risk individuals. Long term it will be positive for banks because it will put more discipline on lending, but in the short term it could create some precautionary provisions because the banks may provision for clients that have a lot of outstanding loans at various banks or with bad payment behaviour over the past 24 months.”
The bureau intends to create a database of the credit history of all retail borrowers to enable banks to build an accurate picture of a potential borrower’s indebtedness, allowing them to assess his or her ability to honour the debt. At the moment banks cannot check the credit history of customers relating to other lenders.
Experience in other countries show credit bureaux can help to stop individuals with a poor credit history from amassing further debt, while easing the flow of credit to those able to repay loans. Banks benefit by generally not having to build such large provisions, or money put aside to cover bad debts, against the risk of defaults.
mkassem@thenational.ae
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