The UAE’s new credit bureau expects borrowing costs to fall by more than 30 per cent once its credit reporting system is in full swing.
“According to the statistics compiled from the World Bank and International Financial Corporation, hopefully we will see at least a 30 per cent reduction in a very short time,” said Younis Al Khouri, the bureau’s vice-chairman and undersecretary of the Ministry of Finance.
A hiring spree is under way at the Al Etihad Credit Bureau, which is set to begin efforts to provide data about individual debtors in July.
“We have already started recruiting,” Mr Al Khouri said. “We have not been successful in hiring a chief executive, but the second layer has already been hired or will join in the coming days.”
The entity has also purchased an IT platform from CRIF, an international firm that is specialised in providing loan origination and lending software.
The Ministry of Finance established the Al Etihad Credit Bureau last year as a stand-alone entity with a paid-up capital of Dh200 million. The bureau is owned by the federal Government, although the Central Bank oversees and supervises its operations.
The bureau consists of two working groups. The first includes 12 banks, the Central Bank and the UAE Banks Federation, the industry lobby group. The second includes the UAE's telecoms providers, Etisalat and du. Those providing information to the bureau could be expanded to include electricity companies such as Abu Dhabi Distribution Company and Dubai Electricity and Water Authority.
The federal credit bureau replaced Emcredit, a Dubai-based credit scoring agency that did not have a sufficient mandate to cover all of the UAE’s banks. It has been wound down.
At an initial stage, the bureau will compile a comprehensive database of individual borrowers, allowing it to provide their credit information for the preceding 24 months, with a mention of any defaults that might have occurred over the preceding five years.
In the second stage, the bureau will compile another comprehensive database of all commercial companies operating in the local marketplace, including joint-stock companies. Financial information on borrowing by government companies will also be included in this database.
In the third and final stage, the bureau will be able to provide a rating for customers, individuals and companies, according to an in-house risk-weighting system.
This stage is expected to be completed by July next year, Mr Al Khouri said.
“We will have better risk selection based on past payment behaviour,” said Jaap Meijer, a banking analyst at Arqaam Capital in Dubai. “We could see lower charges, that will transfer into lower pricing. There will be a benefit.”
As to the fees due in return for its services, the bureau’s board will arrange them into two categories, one for banks and companies, and the other for individuals.
“They will be reasonable,” Mr Al Khouri said.
Customers will be able to see their credit rating and shop around for better prices from the banks.
“This is one of the advantages for individuals, to know their own rating and how good they are,” he said. “And if the bank is not serving them to the extent they feel they should, they can move away from bank X and turn to bank Y.”
Al Etihad Credit Bureau will also establish relationships with international credit bureaux, such as the international player Experian, and the US-based Equifax and TransUnion, especially in countries that contribute a large share of the Emirates’ foreign residents.
The setting up of the federal credit bureau will pave the way for a decriminalisation of failed security cheques for all residents if it is successful, according to the Ministry of Finance.
A total of 1.4 million cheques failed at the point of use last year, representing about one in every 20 cheques used for payments worth Dh46.8 billion. The rate of failure is about 10 times higher than developed countries such as the United Kingdom, despite Britain clearing many more cheques per head of population.
Banks have lobbied the Central Bank to find a replacement system after the financial crisis laid bare the flaws in the current model.