The setting up of a federal credit bureau will pave the way for a decriminalisation of failed security cheques for all residents if it is successful, said the Ministry of Finance.
Asked whether the UAE could decriminalise bounced security cheques if a pilot programme to create credit reports for individuals is a success, Younis Al Khoori, the undersecretary at the Ministry of Finance and vice chairman of Al Etihad Credit Bureau said: "Definitely. We're aiming towards that. It's one of the key purposes of approving this entity."
Mr Al Khoori did not give a time frame for when the law could be changed, although the ministry expects full credit scoring to become available next year.
Al Etihad Credit Bureau will begin a pilot programme in July, with a dozen UAE banks participating.
Currently, cheques account for payment of more than Dh1 trillion in the Emirates every year, with certain transactions such as mortgages required to be backed by security cheques. Bouncing a cheque is a criminal offence, although a presidential decree in October immunised UAE nationals from serving jail time.
Banks use cheques as a means of providing security, because without effective credit scoring it is impossible to determine a potential borrower's likelihood of default.
However, a total of 1.4 million cheques failed at the point of use during 2012, representing about one in every 20 cheques used for payments worth Dh46.8 billion. The rate of failure is about 10 times higher than developed countries such as the United Kingdom, despite Britain clearing many more cheques per head of population.
Banks have lobbied the Central Bank to find a replacement system after the financial crisis laid bare the flaws in the current model.
The new federal credit bureau would "introduce transparency" into consumer borrowing, Mr Al Khoori said. "Whoever wants to have his own personal information, collectively throughout the banks, they can come to the bureau and collect his record," he said.
Those individuals that believe they are being charged too high a rate of interest may be able to appeal their credit rating by providing other information such as consistent utility bill repayments, he added.
At present, the rates of interest available on unsecured consumer finance compare unfavourably to other markets where credit data is more readily available.
The average annual rate of interest on a UAE credit card is 37.8 per cent, which bankers have attributed to the lack of an operational federal credit bureau.
That compares with an annual interest payment of 17.5 per cent on a credit card in the UK, where the adult population is fully covered by credit scoring companies.
The main benefit of a credit bureau is to reassure banks that a customer has not spread debts out across the financial industry by dealing with many different lenders, said Surya Subramanian, the chief financial officer at Emirates NBD and a former adviser to Singapore's accounting regulator.
"We think pricing will improve and products will improve," he said last week.
Additionally, the large amounts of personal financial information which Al Etihad Credit Bureau will store should make the process of gaining approval for personal loans and credit cards better for consumers. "They certainly speed up the credit approval process," Mr Subramanian added.
"As long as every bank is able to provide quality data, the entire industry takes back quality data."