Debt has long been a controversial subject in the UAE. Whether it’s absconding expats, concerns about burgeoning credit levels or accusations of irresponsible lending, the topic easily stirs debate.
So it was not surprising when regulators’ efforts to establish a credit bureau were met with criticism, and scepticism.
But two years after the Al Etihad Credit Bureau launched its services with 26 subscribers and data from more than 50 financial entities thanks to mandatory legislation, the man put in charge of ensuring its success says it is already impacting on the UAE’s banking industry.
“When we started, no one knew what a credit bureau was [or] how it functioned. Even for banks to adopt [the bureau’s services] took time,” Marwan Lutfi tells Arabian Business.
“We are going to change the industry going forward. We have already changed it in the last two years by becoming an integral part.”
Despite reservation during the initial stages, banks are now praising the bureau. Emirates NBD senior executive vice-president Suvo Sarkar says it has filled “a critical gap” in the UAE’s banking environment.
“The bureau provides more clarity on customer exposures and their financial behavior patterns, thus allowing banks to make more informed credit decisions,” he says.
Noor Bank’s business head of consumer finance, Waleed Barhaji, says the enhanced transparency is also benefiting consumers. “Consumers will be protected against the temptation of over extending themselves in terms of debt accumulated,” he says.
The bureau has progressed from collecting data and making that available to subscribers - of which there are now 64 - to analysis. Now Lutfi is preparing to use the analytical tools to predict consumers’ behaviour, with significant elements, including credit scores to be implemented as early as this year.
The UAE credit scores are based on international best practice and will provide a gauge of how likely a consumer is to default within 12 months, with scores between 300 and 900. They are currently awaiting last-stage approval from the central bank.
“This is going to be a game changer by itself,” Lutfi says.
The bureau’s data was anticipated to help lower borrowing costs (such as annual account fees and interest rates) for those with a good credit history. That is yet to happen, although Abu Dhabi Islamic Bank (ADIB) head of UAE retail Philip King says in real terms prices are lower.
“Of course there are other costs that have a direct impact on pricing, which is why some customers may not have seen a drastic reduction in the cost of financing. Having said that, without the Al Etihad Credit Bureau the cost of borrowing for reliable customers with healthy credit profiles would potentially be higher,” King says.
The number of loan application rejections has increased since the bureau launched but banks expect it to return to similar levels pre-bureau as their ability to source quality borrowers improves.
“There has been an increase, which is normal considering the complete visibility of customer debt on the bureau. We see the trend normalising to a large extent with industry and customers keeping abreast of the changes in the new environment,” Citi Middle East head of consumer banking Dinesh Sharma says.
However, not everyone with a poor credit rating will be turned away. The ability to assess a borrower more thoroughly is emboldening some financial institutions to take on more risk.
While some banks will decline or discourage consumers with a low credit score - indicating a greater chance of defaulting - others will seek them out, at a cost. Lutfi expects an entirely new business model to evolve.
“One [financial institution] might say let’s capture all that segment that will be riskier, that might have had some missed payments here and there and we’ll price it differently,” he says. “By providing all information banks can start really developing their own niche in how they service these clients and introduce risk-based pricing. That’s one of the most important things we’d like to see going forward.”
Lutfi says “a handful of entities” have already introduced risk-based pricing.
“Not banks - they have a different set of obligations towards their shareholders - but there are a lot of new companies that are coming [to the UAE], even smaller banks, that are trying to find their niche and that’s an attitude that you will see going forward,” he says.
At the same time, some financial institutions will use the data to tighten up their risk profiles.
“A bank may say ‘we have so much higher risk, we have the potential for NPL [non-performing loan] ratios of this level and well, this year, we don’t accept [borrowers with high default risk],” Lutfi says.
Benchmarking reports, which the bureau plans to introduce this year, should help financial institutions gain a better understanding of their risk profiles in the context of the entire sector.
“Any CEO today bases a lot of the decisions in a bank or a lending institution on the data that that entity has because they don’t have access to other data. We aggregate the whole data, so if your credit card portfolio has grown by 20 percent you also want to know if your credit card portfolio is defaulting at the same rate that the market is,” Lutfi says.
“This is changing the mechanics of how banks will operate going forward. You will be able to know the probability of default … not just on credit cards, this is going to be on any credit facility possible, in any age group, at any specifics.
“This changes the way retail and risk work. Risk is always conservative, retail is always aggressive. One is going for the sale, one is saying I need to make sure my books are managed from a risk perspective. We’re trying to get harmony. Banks have expressed a lot of interest in seeing and subscribing to this.”
The changing appetite for risk should benefit consumers, he argues. Those with higher risk will still be able to access credit, albeit at a higher cost. While those with lower risk ought to be able to demand lower borrowing costs.
“We want to give a tool to the banks to manage their finances, to manage their books better; at the same time we want the consumers to benefit,” he says.
“In the past … [financial institutions have said] let’s set a minimum default rate or loss rate for this credit line and then we [will charge everyone accordingly], so you get charged 3 percent on your credit card, I get charged 3 percent on my credit card, because I’m a victim of the behaviours of the market. That’s what’s happening. But why? If you’re a good client, why would you pay these higher rates when you’ve never had a default, never missed a payment?
“The more information we provide, the more [borrowers] can shop around a bit and say ‘we’ll wait, I’m a good customer’. You want consumers to feel that they’re empowered, they’re not driven by what the banking industry feels or the market consensus.”
The bureau is expanding to include telecom companies and real estate agents, with retailers and government services such as courts and traffic fines to be potentially added in the future. According to the World Bank, including information from non-financial institutions strengthens a credit bureau’s ability to predict default.
“We’re trying to build a behaviour pattern to understand how borrowers behave and that behaviour generally is linked to several other financial obligations in one’s life, or in one’s history if it’s a commercial entity,” Lutfi says.
Dubai-based telco Du is already tapping into the bureau’s services for some customers. Chief financial officer Amer Kazim says the digitisation of industries makes sharing information “extremely useful” to both businesses and customers.
“Not only does our partnership [with the Al Etihad Credit Bureau] allow us to improve the management of credit risk, but we can also advise our customers on making informed decisions on extending their credit in relation to obtaining our services,” he says.
“For example, customers who have a good credit profile will benefit from premium services and minimum documentation requirements.”
Lutfi says credit data also allows telcos to confidently build up their post-paid customer portfolio, which is the more profitable side of the business.
“It’s in the telecom’s interest to convert the prepaid customers into post-paid customers but how do you know that if I convert this person into a post-paid account, that they’re not going to be defaulting, not going to miss payments? This is when we kick in because we can develop this correlation and say we have data no one else has access to,” he says.
“By having that core data and plugging it in with the behaviour of telecom companies and all of the accounts that belong to individuals and companies we can start building predictive models, even developing specific telecom [credit] scores.”
The bureau also is in discussions with “a few large real estate companies” to develop real estate credit scores.
Lutfi says landlords are wasting resources on chasing missed rent payments or bounced cheques. A real estate credit score would help to minimise that risk and give both the landlord and the tenant the ability to negotiate how often the rent is paid over the year.
“So if you want to rent and you have a lower [credit] score the landlord can demand one cheque, but if you have a higher score they can take that risk [of allowing 12 cheques],” Lutfi says. “That will hopefully change the attitude towards the real estate sector we live in.”
Next in line will be utilities, Lutfi says.
The end goal, he says, is for subscribers to be able to “slice and dice” credit data any way they want.
Some banks have already implemented the bureau data into their own IT systems to enable them to create automated processes and assess applications on the spot. The digitisation of the data also allows subscribers to cherry pick or prioritise which of the 150 indicies are most relevant to its goals.
Lutfi concedes the implementation has been slow.
“Several banks have piloted it [but] the uptake has been low because some have very large IT budgets that can immediately start deploying integration; some have different priorities.”
The bureau is working on providing subscribers with live alerts that would notify them when a borrower has missed a payment from any institution that provides data to the bureau, or if they change information such as a mobile number or address.
“It helps to look at risk from different perspectives.”
Banks have said that this enhancement of value-added services will take the UAE financial industry a step forward.
While every registered financial institution in the UAE is legally obliged to provide the bureau with the credit data of all of its customers (there are now 64 providers, including non-banks Dunia Finance, Reem Finance, Amlak Finance), there has been criticism that the bureau lacks data from international institutions - a particularly pertinent point for a country such as the UAE where at least two-thirds of the population are expats.
Sarkar says it is a missing element in the bureau’s data.
“It would definitely assist banks in making more informed credit decisions by having access to information on credit behaviour of customers prior to their moving to the UAE, either from their home country or their previous country of residence. This may also assist financial institutions in tracing customers who may have ‘skipped’ or left the county with outstanding debts and facilitate recoveries,” he says.
Lutfi says he has held talks with international credit bureaus but any collaboration is unlikely in the near future. Separately, foreign lenders are becoming aware of the Al Etihad Credit Bureau and increasingly demanding credit reports from loan applicants who either live in the UAE or have recently left.
The bureau’s existence is increasing awareness among consumers of the importance of good borrowing practices, Lutfi argues. But, he says, still too many people blame the bureau when their loan application is denied, indicating a certain level of ignorance remains.
“It’s easy for institutions to blame or point the finger. What we want [consumers] to understand is there is a reason why this is happening,” he says. “Awareness has to be through the banks.”
Sarkar argues that educating the population should be part of the bureau’s responsibility.
“The bureau should also look at educating the UAE population on the impact of their credit behaviour on credit ratings, and the repercussions on their credibility to borrow in the near future so as to encourage being a good borrower,” he says.
As the new depth of credit knowledge among financial and other institutions increasingly impacts on consumers’ ability to borrow or take out other services, their understanding of credit ought to organically improve.
Lutfi says it has not been an easy task to convince financial institutions and consumers of the merits of the bureau. While the banks now appear to be supportive, despite some desired areas of improvement, Lutfi concedes more needs to be done to educate the public.
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