Bounced cheques: Banks urge sharing of internal credit scores with each other as the creation of a federal credit bureau moves closer to reality.
Bank warns of hurdle to success of UAE credit bureau
A federal credit bureau has moved a step closer with the registration of all residents by the Emirates ID Authority.
But bankers have warned further progress could be impeded unless banks are willing to share the credit scores of their customers.
Lenders must trust each other and share data to speed the establishment of a federal credit bureau, said Farhad Irani, the head of Mashreqbank's retail banking group.
Banks' reticence to share information on their most creditworthy customers could be one factor inhibiting the collation of detailed credit scores, said Mr Irani, who took part in Indonesia's efforts to establish a credit bureau during the past decade.
"One of the operating tenets of a credit bureau is you get because you give," he said. "What happens sometimes and creates frictions, which I hope we will not see in the UAE, is that the larger banks will not share information which is proprietary to them."
The establishment of a credit bureau is viewed as essential if the UAE is to kick its reliance on cheques backed by criminal penalties, which have proven unreliable and a major factor behind the Dh46.8 billion (US$12.74bn) in failed cheque payments last year.
Around one in every 20 cheques failed at the point of use last year, which analysts say represents an economic deadweight for the UAE.
A consensus has emerged among bankers, politicians and economists in recent months that the UAE should decriminalise bounced cheques for all residents.
However, HSBC has warned that a move to decriminalise cheques in line with international standards without establishing credit scores could result in banks becoming unwilling to lend to consumers.
A law was passed mandating the creation of a federal credit bureau in 2010; however, progress has been slow. Recent movements on debt legislation include a presidential decree immunising Emiratis from serving jail time for bouncing a security cheque.
Sharing data on customers' defaults - also known as negative data - is the first step required by banks, Mr Irani said. Then, banks must share positive data - data on which customers repay on time.
"The sharing of positive data is a big step for the bureau," he said. "The banking industry at large doesn't know what our total exposure is and what [customers'] debt service ratio is on a monthly basis."
Some banks had initially fretted about the best customers being "poached" if banks shared full credit histories with each other, said Suvo Sarkar, the general manager of retail banking at Emirates NBD. "There were initial concerns," he said. "The most important asset we have is data on customers, but at the end of the day this will help move the entire banking industry forward."
The completion of the Emirates ID Authority's registration drive would help enable the creation of the federal credit bureau by giving one unique identifier for every single customer, Mr Sarkar added.
"Emirates Identity Authority is providing the ID card with the technical support needed to entities to facilitate transactions and to apply services and help enhance internal processes," said Ayesha Al Rayesi,the Emirates Identity Authority's executive director of central operations.
Though the process of establishing the credit bureau was in an early stage, convincing banks of the virtues of data sharing was not anticipated to be difficult, said Arup Mukhopadhyay,the head of consumer banking at Abu Dhabi Commercial Bank.
"Collectively the credit bureau, like many other developments, benefits everyone," he said.
Mr Irani said that customers would also benefit from the establishment of credit scoring as banks become more disciplined in their lending. "Once you have bureau scores, you have a very efficient market and customers gain tremendous convenience," Mr Irani said. "Also, your application form becomes so much smaller," he added.