Any sophisticated economy needs a strong credit bureau, an entity that can draw together consumers’ debt information from across the entire market. It helps to protect both financial institutions and borrowers.
While there was plenty of scepticism when the UAE announced in 2013 that it would launch Al Etihad Credit Bureau, by all accounts it has helped to increase transparency and fill what bankers say was a “critical” gap in financial infrastructure.
But there is a concerning factor that may even work counter to the bureau’s goal of reducing bad debt. The increased depth of knowledge about potential borrowers and their likelihood to default allows lenders to take greater risks — at a cost to the borrower, whether an individual or business.
The bureau’s CEO Marwan Lutfi revealed to Arabian Business that some financial institutions are using the data to target borrowers with a low credit rating and, rather than highlight their potential to fall into a disastrous spiral of debt, they are offering loans at exorbitant prices compared to the market average.
Lutfi says there are even new firms setting up with business models based on these high risk borrowers.
Coupled with this is the persistent problem of cold calling by banks offering personal loans and new credit cards, as well as automatic credit limit upgrades. Not only do they actively encourage burgeoning debt levels but they quite wrongly expect the consumer to opt-out, rather than opt-in, let alone ask for the higher credit limit in the first place.
While these practices are legally restricted, they continue to happen. I know from personal experience on a regular basis. The best counter to these concerning practices is education. Globally, there is far too little financial literacy taught in both formal education and in public awareness campaigns.
Lutfi agrees. “You’re absolutely right, awareness for us is very important,” he said during our interview (see page 28).
But then he revealed a pertinent point: the bureau is run as a private company (with the federal government currently its only shareholder), which means its aim is to eventually be profitable. Spending income on public awareness campaigns eats into that potential profit.
“Let’s be honest, it’s very expensive to look at this,” Lutfi said. “We try to operate as though we were in the private sector… Awareness has to be through the banks.”
But the banks also pass the buck. Emirates NBD senior executive vice-president and group head of banking and wealth management Suvo Sarkar told Arabian Business the onus was on the credit bureau to teach consumers good borrowing practices.
“The bureau should … 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 said.
It is a stretch to expect banks to actively teach consumers financial literacy — debt, after all, is how they make their millions of dollars annually — but banks that encourage debt must take some responsibility.
At the same time, so too must consumers. Anyone who does not realise that there is no such thing as free money is gullible. But the fact more than 4,000 people walk into the credit bureau’s Dubai or Abu Dhabi offices each month, typically to complain that their loan application was rejected, signifies the level of ignorance that remains.
It also opens up a significant opportunity for the bureau to educate the public. It cannot simply operate as a data collector and aggregator.
The aim of the credit bureau is to reduce bad debt and levels of default. Purely highlighting those who are more likely to default will not achieve that — someone will still lend the money, and at a higher costs that adds to the debt.
Lutfi speaks of wanting to add value to the information, well, the best way to do that is to actively educate the population.
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