For years banks, business leaders and regulators have been calling for a UAE-wide credit bureau. So it is welcome news that the Central Bank will move from theory towards reality this summer. About 13 lenders will take part in the planned pilot project, The National reported this week.
Bank lending in the UAE is expected to rise by as much as 10 per cent this year, and while personal borrowing is only a fraction of the total, improved information about individuals' creditworthiness promises to provide at least a partial solution to several problems.
Most developed countries have credit bureaus, services which can inform a would-be lender about the credit history of the would-be borrower. Has this person repaid previous loans and paid bills promptly? How much does he owe right now? Are her debts sensibly structured?
The benefits of such a service are numerous, but not all are obvious. By refusing loans to those who are already overextended or who have poor track records on repayment, lenders can avoid bad debt. Imprudent borrowers can be saved from themselves. Anyone eager to maintain a good credit record has an extra incentive to make payments on time.
Further, a good record may bring a borrower a lower interest rate than he could otherwise expect. In the UAE, interest on credit-card debt averages 37.7 per cent, double the rate in the UK. One defence banks offer for this is that they carry a big burden of bad debt on cards. So in theory, at least, rates may fall once banks learn to tell good risks from bad.
Reliable credit information should also move the banks away from the security cheques they now demand when granting credit. When things go wrong, those cheques can land a person in debtors' prison (although Emiratis are now immune), an antiquated and useless non-remedy. Better information may also cut the rate of failed cheques, which hit 5 per cent and Dh46.8 billion last year.
Of course, credit bureaus are no panacea. Such services operate nationally or sub-nationally - a Dubai credit bureau has been dissolved to make way for the federal one - but there is no easy way to check a credit record internationally, a real weakness in the UAE. Another problem is that an error in your credit record can plague your financial standing for years. And the launch of this pilot project is not to be confused with the arrival of full-scale operation. It will take a year, at the least, before the new UAE-wide bureau is in full operation.
As in any human endeavour, there will be start-up difficulties and bugs in the system. But the result is well worth the effort. Coming as it does in parallel with a separate Central Bank project to allow for direct debit payments, the credit-bureau plan shows how rapidly the UAE's financial system is moving.