Glass Walls

Without an official consumer credit bureau in the UAE, banks and financial institutions have had little reference when assessing borrower’s capacity to pay back a loan. As a result, the lending environment in the Emirates has experienced over-borrowing and credit defaults in the past. A consumer’s less than stellar credit history can easily go unnoticed in the absence of a historical database tracking financial behavior. With the launch of the Al Etihad Credit Bureau (AECB), the UAE has embarked on a landmark development in the country’s retail-lending environment.

The AECB began issuing its first credit reports in September 2014. The Bureau is the country’s first centralized credit reporting system mandated by law to compile a database of credit information and make it available to credit providers nationwide. Banks and financial institutions will now be able to access consumer’s credit data from the past 24 months, adding more comprehensive financial data to the system than was previously available and equipping financial institutions with a more accurate record to determine a potential borrower’s credit risk profile. The bureau is expected to be a significant positive contributor to the financial stability of the UAE and the arrival of such a system has been long awaited.

Credit check reforms in the UAE were initiated years ago. The country’s charge to improve lending standards began with Emcredit, the first private credit information company set up in the UAE in 2006. It gathered a database of 5.6 million consumer identification records by 2008, but the need to establish a federal-level entity intensified when the global financial crisis hit and scores of bad debt surfaced in the UAE in 2009. This prompted local authorities to begin implementing subsequent reforms to the financial sector’s standards on assessing consumers’ creditworthiness. The passing of the Credit Information Law the following year made background checks on all loan applicants compulsory, and in 2010, plans to initiate a federal credit bureau to support the law were approved by HH Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE and the Ruler of Abu Dhabi. The path to a more disciplined, data-driven financial lending environment now appears to be on the cards for the Emirates.

Compliance with the bureau from financial providers has been widespread. As of November 2014, the AECB’s database covers 90% of credit data submitted to the bureau by banks and financial institutions over the past two years. Now, over 2.8 million individuals are accounted for, representing 97% of the UAE’s total population with a credit history. Some 43 banks and financial institutions have submitted customers’ credit data and 29 have subscribed to the bureau’s credit reporting service. Further testament to the bureau’s increasing adoption is the support the AECB has received from the UAE Banks Federation, a national entity representing 49 banks in the Emirates. Banks will begin using the data to revamp their lending standards and will be better equipped to identify and refuse loans to high-risk individuals.

This new era of transparency in the UAE’s financial sector comes at a much-needed time with debt per capita in the country currently at around $95,000 per person, exceeding the global average. As banks integrate the bureau’s credit reports into their systems, credit culture in the country is expected to improve as greater financial awareness spreads throughout. Evaluating customers’ reports before offering credit terms should reduce the amount of bad debt and make high-risk individuals easier to identify. Tracking financial history and behavior will also serve to incentivize sound financial management in the economy at large. Those who pay their debts on time will be rewarded by lenders through lowered costs and better interest rates. Costs of financing will likely shift from standardized prices to tier-based prices depending on good or bad credit scores as banks use the data to assess risk. In the same way, those with unsavory credit histories will be encouraged to change their behavior in order to build up their credit score by managing their finances responsibly and within their means. Overall, the use of credit reports in the UAE should encourage sound financial management in the country, as the possibility of slipping through the system will be more difficult than ever.

In 2015, the first full year of operations will be marked at the AECB, and it will continue to build on its data store, progressively developing in phases along the way. It will add more dimensions to its suite of services to lenders and plans on including the commercial sector in its database in the near future. Eventually, the bureau intends to link up with international credit bureaus such as Experian, Equifax, CIBIL (India), and SIMAH (Saudi Arabia). Though the bureau’s presence alone doesn’t guarantee more responsible financial decisions will be made, it is an important step in preventing over-borrowing in the UAE—one that consumers, lenders, and the economy as a whole should feel the benefits of.