UAE residents warned credit bureau will lead to years of financial difficulty for some customers

Banks Federation chairman warns of significant increase in the level of personal defaults once the credit checking structure is in place.

Abdulaziz Al Ghurair, chairman of the UAE Banks Federation. Jeffrey E Biteng / The National

One of the UAE’s top bankers has warned that some customers face years of financial difficulty, with the possibility of a significant increase in the level of personal defaults, as a result of the new credit checking structure to be introduced later this year.

AbdulAziz Al Ghurair, chairman of the UAE Banks' Federation and chief executive of Mashreq, told The National that up to 7 per cent of customers could default on their financial obligations once the Al Etihad Credit Bureau, the UAE's new assessor of individual and corporate credit-worthiness, is in place.

The new body aims to coordinate data on loans, credit cards and other lending by the country’s 52 banks, in a bid to cut down on excessive borrowing.

“There is good news. The credit bureau is nearly ready. But there will be some pain. We expect there will be an increase in the level of personal defaults, but this merry-go-round will stop. The banks will discover how much they have overlent to retail customers and there will be clarity.

“Retail customers will discover they’ve overborrowed and cannot borrow any more,” Mr Al Ghurair said.

He estimated the level of defaults would be between 5 and 7 per cent, and that the effects could be felt for a comparatively long time. “The pain will last two years, maybe more. They [some retail customers] will not be able to borrow any more,” he said.

He said that bank customers who have overborrowed would have to adjust their spending habits accordingly. “For example, they will have to drive a car in line with their income, not a BMW or a Mercedes,” he said.

Mr Al Ghurair said that the new credit measures would be good for the economy, the banking sector and for customers themselves, and could help fend off the danger of a new “bubble” in the UAE economy similar to that which burst in 2009 during the world financial crisis.

He estimated the effect on the UAE’s financial industry would not be intolerable.

“Growth in profits has been 20 per cent, if it falls to 18 per cent that is still phenomenal. The banks can take the pain and expect customers to do the same. It’s healthy for you to lose weight,” he said.

The Government and banks have already paid a heavy price over consumers becoming entangled in debt. In December 2011, the Ministry of Presidential Affairs launched the Debt Settlement Fund with an initial budget of Dh10 billion to help bail out indebted Emiratis, often with multiple credit cards and loans.

Banks have also had to set aside billions of dirhams since the 2009 crisis to safeguard themselves against soured loans, some relating to consumers.

But in recent quarters, lenders have started to see the light at the end of the tunnel. For the first time since 2007, non-performing loans peaked in the final quarter of last year.

The bureau will initially focus on providing banks with reliable credit data about consumers, allowing them to make informed decisions about who they lend to.

By next year it will provide the same information about companies.

After the official publication of the bureau’s bylaws earlier this year. it was expected to launch operations this month and once fully up and running it should ultimately instil banks with the confidence to continue consumer lending, while allowing them to be more selective about who can borrow from them, if evidence from other countries is indicative.

Since Singapore launched a credit bureau in 2002, the average monthly credit card balance per consumer has jumped by 54 per cent to $5,034 in 2012 from US$3,275.

But despite the rise, the average default rate for credit cards has dropped to 2.07 per cent in 2012 from 2.4 per cent in 2002.

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