Mohammed, an Emirati engineer, has racked up hefty debts during the past three years.
Long-term loans with low interest rates from several banks were supplemented by two credit cards to allow him to afford two new cars – one for him and one for his wife – exotic holidays and home furnishings.
While Mohammed, who does not want his full name published, refused to say how much his total debt was, he said it had reached “huge” levels. He is not alone. National debt among UAE residents stood at US$95,000 per household, according to a study released in July by Strategic Analysis. Personal loans to residents rose by 3.8 per cent to Dh270.7 billion between January and May compared with a year earlier, according to data from the Central Bank
In an attempt to better control what some observers warn could become a personal credit bubble, the Government will from 2015 have the nationwide credit bureau fully operational.
The Al Etihad Credit Bureau is designed to give banks and eventually telecoms and utility companies a better understanding of the financial track record of existing and potential customers.
At an initial stage, the bureau will compile a comprehensive database of individual borrowers, allowing it to provide their credit information for the preceding 24 months, with a mention of any defaults that might have occurred over the preceding five years.
It will later compile similar financial information on all commercial companies including joint-stock companies and government-linked firms. In the final stage, the bureau will be able to provide a rating for customers, individuals and companies, according to an in-house risk-weighting system.
In a prediction of just how effective the new operation may become, Abdul Aziz Al Ghurair, the head of the UAE Banks Federation (UBF), the banking industry group, said this month the supply of new credit to existing customers could nearly grind to a halt once the facility launches.
He doubted there would be lending for six to 12 months to already debt-laden customers as “banks will find out who’s really been borrowing and how much”, said Mr Al Ghurair, who is also the chief executive of Mashreq.
One of the trends the bureau’s existence may help to reverse is the credit binge many Emiratis have gorged on since the global financial crisis.
After being burned by mounting personal loan defaults during the downturn, worsened by a wave of job losses mainly affecting expatriates, many banks have since skewed their lending more towards Emiratis, viewing them as less of a credit risk. As a result, Emiratis have been able to amass large debts, sometimes spread across several lenders.
“I have not ever had problems getting a loan or credit card from any banks,” said Mohammed, adding that he was now actively seeking to pay off his debts.
The Government has already tried to slash personal indebtedness by launching in 2011 a Dh10bn fund to help consumers restructure loans in cooperation with their banks.
The bureau will also offer more transparency on borrowing by companies.
In a report in June, the IMF said data availability on financial conditions, debt stocks and maturity profiles of Dubai’s companies remained “inadequate” for an assessment of their financial health.
Dubai World and other large corporates have made progress on restructuring billions of dollars in debt recently. But the emirate’s debt still stands at $142bn or 102 per cent of GDP, according to the IMF.
Officials say the bureau will also help to cut the cost of lending for consumers and corporates alike.
Borrowing costs could fall by more than 30 per cent once its credit reporting system is in place.
“According to the statistics compiled from the World Bank and International Financial Corporation, hopefully we will see at least a 30 per cent reduction in a very short time,” Younis Al Khouri, the bureau’s vice chairman and undersecretary of the Ministry of Finance, said in May.
A reduction in borrowing costs and more responsible lending policies should help to create a healthier financial climate suited for more sustainable credit growth.