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Mon 1 Jan 2007 12:00 AM

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Credit to the nation

The opening of the UAE’s first credit bureau could give lenders the means to better judge and manage risk, and may even open up brand new markets.

Look up your credit record and it would be a major achievement to find the information held on you to be up to date, or even accurate. Up until now, there has been no completely independent credit bureau in the Middle East, meaning that lenders cannot be sure how much of a risk they are taking, and that potential borrowers may be denied a loan because the information held on them is inaccurate.

Emcredit hopes to change this situation. Headquartered in Dubai International Financial Centre, the credit bureau aims to remain equidistant from borrowers and lenders in order to provide a reliable, regularly updated source of borrower information for lenders in the UAE.

However, Bashar Saleh Qallab, CEO, Emcredit, warns lenders that they must be prepared to make a commitment to sharing borrower information and not necessarily expect instant returns.

“A lot of people are looking at an immediate result and obviously a credit bureau is a longer term initiative,” he says. “It’s supposed to help provide a sustainable information environment.”

At time of writing, seven banks had signed up for membership, and met the particular criteria demanded by the credit bureau.

“Obviously it’s not like joining a golf club, you don’t have someone fill out a form and give you a cheque,” says Qallab. “You have to check that they have the right kind of data so that they don’t hurt the quality of the data pool, that they can deliver data at the right frequency, and ensure that they’ve got their legal infrastructure and their compliance in place.”

This could mean that some UAE lenders are not ready to join without making some internal changes, but Emcredit is committed to helping them comply with the bureau’s standards. “We’re open to allowing all the banks to join and we’re committed to receiving 100% coverage from all the banks as well as other credit providers, but there are certain banks that will need to effectuate a couple of changes before they can get membership, and those changes aren’t too demanding,” Qallab says.

“They involve either legal changes in things like their loan applications - they might have to add or change a clause – and they need to have the capability to update their own systems internally.

“If they can’t update their systems within a reasonable timeframe and everyone else is updating on a daily basis then that poses a challenge, but it is open to every bank in the UAE.”

Although many banks in the UAE have advanced technical systems in place, the processes that support them may not be so well developed. “They’ve invested a lot of money in CRM (customer relationship management) solutions and a lot of money in risk solutions, but those solutions rely on data quality, which is reliant not only on the volume of data that you have but also the process that captures that data,” says Qallab.

“I think there hasn’t been enough investment from what we’ve seen on the data acquisition process on the banks’ part, in terms of the processes that capture data, right down to things like the application forms: how they’re designed, what they’re geared to do.

“Part of this isn’t the banks’ fault. The availability of information in the market is limited. That’s something that Emcredit will have to resolve.”

The credit bureau may be a long way from signing up all UAE lenders to the scheme, but Qallab believes the principle is strong enough to appeal to all of them. “I don’t think there’s a single bank in the UAE that is against the concept of improving information so that they can make faster decisions based on more accurate information,” he says.

“Sometimes people really have to understand how it works in order to dedicate the resources to go through the membership process.”

Banks pay a fee according to how often they use the bureau’s information and a general fee for upkeep and maintenance, which is paid annually.

One issue for creditors wishing to join the scheme is how the information will be managed. Emcredit operates under a data protection law which enables effective data sharing and gives privacy protection to individuals, even though DIFC classes the bureau as an unregulated entity.

“That data protection law ensures that when we receive data we handle it fairly, securely and with prudence,” says Qallab. “And that’s designed to protect the public, to ensure that we’re not processing information we shouldn’t be processing.”

While many other markets have a privacy commissioner and data protection law, there is currently no data regulation law in the UAE. However, Qallab thinks that it is important for borrowers and lenders alike for one to be put into place.

“I think it helps all the stakeholders, Emcredit included,” he says. “It clarifies how they interact with Emcredit and it creates a lot of rights for the public in terms of accessing their information. We’re committed to giving people access to their credit information reports, but a law should be executed that really clarifies all of this.”

It would also help make it easier for creditors to join a credit bureau in the first place, Qallab explains.

“Before we agree to give anyone information we have to write a contract between us and them,” he says. “If there was a law you wouldn’t need a membership because the law says you can give information to XYZ for XYZ reason.

“That doesn’t exist, that’s why we have to have a membership agreement, and in that contract we create obligations.

“If the law were to come into play you wouldn’t necessarily need a membership structure because it would clearly say that you cannot pull up a credit information report or any kind of data other than for these reasons.”

Being a member of a credit bureau should mean that creditors are able to comply with Basel II requirements more quickly, Qallab believes, since they will have industry-wide benchmarks with which to compare their own risk ratings.

Better credit information should also make it easier for lenders to judge loan applications from small and medium enterprises (SMEs).

“I think SMEs as a segment are under-penetrated,” says Qallab. “The reason why is because they ask for relatively low value loans and assessing the credit worthiness of that respective loan is difficult for banks.

Then you’ve got limited liability and a lot of issues surrounding that general area. But SMEs represent around 80% of our economy and they drive regional growth, so one of our visions is to help SMEs have better access to credit by providing better, more standardised information about them.

“For example, a credit report about an SME could actually demonstrate that they are a good credit risk, they pay their bills on time, they’re actually doing fairly well and they want to open up a new branch.”

Improved information on borrowers could also help banks to come up with ways to better manage their credit portfolio. Qallab says: “This allows banks to diversify their credit portfolio and to actually segment it.

You’ll find a lot of people are talking about segmentation of their credit portfolio right now. Segmentation is done on product lines, whereas it should be done according to people and then products should be developed according to that.”

If the UAE’s first credit bureau is a success, it seems likely that similar services will be established in other countries in the region. In particular, proposed monetary union of the Gulf countries and greater freedom of movement between them could see the emergence of a cross-border GCC credit bureau.

Qallab suggests that the prospect of someone working in, for example, Saudi Arabia during the week and living in the UAE at weekends could encourage the formation of such a body. “Having a centralised database on consumers as they become more regionally transient will become a significant driver of a regional or GCC-wide credit bureau,” he says.

For the moment though, it remains to be seen whether UAE lenders are prepared to look to the longterm. If they are willing to cooperate for the greater good, they could see a big improvement in default rates.

On the other hand, lenders that remain outside the scheme could find that bad credit risks, turned down by banks with access to reliable credit information, turn to them, knowing it is unlikely their history of defaulting on loans will be spotted.

It is up to creditors to decide how much risk they really want to bear.

Questions that lenders need to ask themselves

• Is a late payment necessarily the borrower’s fault? Could it have occurred due to payment processing delays by their employer or bank?

• Should late payment of a credit card bill count as a default, even though the borrower may have adequate funds in their current account?

• Should lenders have access to other information, such as utility payments or visa status?

• Should expat borrowers be able to take good credit history with them when they leave? If not, why should they care about having a good credit history?

• Should borrowers know who is accessing their credit report, and what information it contains?

• Does there need to be a regulator of data for each country or the region?

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