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The challenges facing the UAE’s long-delayed credit bureau

THE LEVANT  – By Courtney Trenwith  -Whether or not you lived in Dubai during the economic crash, you would have no doubt heard the stories of luxury Ferraris and Lamborghinis abandoned at the Dubai International Airport car park, while countless debtors fled the emirate unable to repay the mountains of cash they had borrowed.

The story goes that most of those debtors had multiple credit lines and getting more was as easy as turning up to another financial institution. It may not have been quite so simple but it was almost.

Until last week, UAE financial institutions, as well as leasing companies, investment firms and the like had no avenue to check an applicant’s credit history — how much they had already borrowed and whether they had defaulted on existing or previous loans. Assessments could only be half-completed based on a customer’s salary and their history with that bank.

Such security exists in all advanced economies and following the now infamous stories of abandoned cars — and the six-figure loans that went with them — it didn’t take long for UAE authorities to realise the detrimental impact that had been caused by not having a coordinated federal credit bureau.

Finally, last Monday the long-awaited Al Etihad Credit Bureau began issuing consumer credit reports to banks and financial institutions. It had been delayed twice, but let’s not get into that, the good thing is it is finally here.  More than 5.2 million credit facilities of individuals residing in the UAE have been added to the bureau’s credit reporting system. This represents 97 percent of the total credit facilities in the UAE, including credit cards and loans, according to the bureau.

The bureau is good news for everyone — even those who cannot afford to borrow. Defaulting on debt can lead to a criminal, not civil, offense in the UAE — and therefore punishable with a jail term — so having a loan application rejected could actually be a blessing in disguise. Abandoning the debt, as scores did during the financial crisis, also leaves defaulters in a bind, unable to return to the UAE, now one of the world’s biggest connection points.

With the most recent research on debt levels, released last week, showing more than one-quarter of respondents polled by compareit4me.com, a UAE-based finance comparison website, had missed a payment on an existing loan and 5.8 percent had often defaulted, the necessity for a credit bureau is alarmingly clear.

About 77 percent of respondents confirmed they had some form of debt with UAE banks. Credit cards (54.7 percent) topped the list, followed by personal loans (43.6 percent), car loans (12.6 percent) and mortgages (4.1 percent). Meanwhile, the Middle East has become a massive, massive spender on luxury goods. In the past 12 months an incredible $73.5bn — yes, $73.5bn — is estimated to have been spent on luxury goods. That’s 30 percent of all luxury spending on the planet. And within the Middle East, the biggest luxury hub is Dubai, where in the last year $2.2bn was forked out. All of which means that today Dubai has, at $1,900 a head, the highest per capita spending on luxury goods anywhere in the world.

And that may actually rise with the credit bureau; the reduced lending risk should bring down the cost of credit for worthy customers. However, don’t expect immediate results. Despite having two years of data already in the bank, the bureau’s impact is yet to be tested and it will rely on all lenders continuously providing customer data — and actually using it.

One of the country’s best bankers in history, former National Bank of Abu Dhabi CEO Michael Tomalin, told me last year, “Individuals are being reckless by over-borrowing, not banks”.

With that in mind, plus the persistent challenge for staff to meet targets and bonuses, and the fact that only one bank provided the required information initially, which the bureau blames for the delay, it remains to be seen how seriously institutions will take this new measure.

The UAE government has done its bit. Now the banks must do theirs.

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