x Abu Dhabi, UAEFriday 28 July 2017

Calls for a credit bureau

As the Government ponders regulations that would make background checks for loan applicants mandatory, consumers and financial advisers are renewing their call for improved accountability.

Zaid Kamhawi, the chief business officer at Emcredit, says a mandatory credit bureau is essential to an efficient UAE economy.
Zaid Kamhawi, the chief business officer at Emcredit, says a mandatory credit bureau is essential to an efficient UAE economy.

Ever since she moved to the UAE in 2006, Kelly Butterworth has made it a point to pay her bills on time. This sense of responsibility to meet her financial obligations comes from having spent many years in Australia, where she rarely, if ever, missed an instalment - and for good reason. Ms Butterworth, a 36-year-old recruitment specialist from Down Under, says falling behind on mortgage and utility payments back home would lead to poor credit rating. Banks and financial institutions would subsequently think twice about lending money to a anyone that defaults on their payments.

Having a black mark next to your name is bad enough, but the consequences of failing to meet loan repayments in the UAE could be far more severe. It's not unusual for people with debts to face travel bans once the police have confiscated their passports, and spending time in jail is also not an uncommon occurrence. For Ms Butterworth, such measures encourage people to flee the country, which is why she believes an efficient, fully-functioning credit bureau - a company that provides creditors with an individual's financial history - is a must.

"In Australia if you get a bad credit rating you are stuffed and it takes a lot to get out of it, so I am very cautious about paying bills here on time and not defaulting because I am responsible and know I can't just leave," she says. "But because this is an expat country, people do just get up and leave, so there needs to be a credit bureau as a stop guard. Alwyn Owens, a Dubai-based financial adviser, has encountered many people in the UAE who would have struggled to secure loans had they undergone credit bureau checks. The Welshman, who is with Dubai Financial Advice, an independent financial advisory firm, recalls the story of a client who had no option but to leave after racking up huge debts.

"I can't mention names or where they work, but a Filipino gentleman I knew had about a Dh120,000 debt and he left the country overnight," Mr Owens says. "He accumulated more than 10 credit cards, maxed them out, and all of a sudden he's gone. I was recently asked by a company to talk to some of its staff who had got themselves into financial trouble. It's easy to get credit from banks because all they need to produce is an employer's letter stating the salary they are on. People need to learn about the pitfalls before falling into them."

Similar stories of people abandoning the UAE with huge debts have raised calls for a fully functioning credit bureau in the country. That call was partly answered three years ago when Emcredit was launched as a Government initiative to compile financial reports on individuals living across the Emirates. The data ranges from payment history, showing whether individuals have settled bills on time, to the amount of debt one carries. Once collected, the data is passed on to financial institutes and banks, which can then assess whether they should approve, say, a loan application, based on the applicant's credit history.

Of the 53 banks and financial institutes operating in the UAE, fewer than half are using Emcredit's service. The problem, according to the firm's chief business officer, Zaid Kamhawi, is that credit checks are not mandatory in the UAE. And until they are, he adds, the country will have to make do with a semi-efficient credit bureau that cannot force companies to use Emcredit's services. "We knew a system where membership to the bureau is voluntary would make uptake by banks much slower," he says.

Changes may be afoot, however, with the UAE Government considering a proposed Credit Information Law, which would make background checks on all loan or mortgage applicants, for example, compulsory. Talks concerning the law began in March of last year, with little development since. When discussing the proposal in 2009, Emcredit's managing director, Ali Ibrahim, claimed such regulation would help foster more sharing of date among financial institutes and offer more privacy for individuals and organisations. He also said it would create an established framework of rights and obligations for local credit information providers.

It remains to be seen whether the Government passes the Credit Information Law. But Mr Kamhawi has no doubt such a bill would enhance credit reporting in the UAE. "Once a credit bureau is fully effective it creates disincentive to default because you're trying to get credit. If your reputation is tarnished you won't be able to access further loans," Mr Kamhawi explains. Similarly, Chris Green, managing director of Independent Finance, a firm based in Dubai that specialises in mortgage financing, believes credit bureaus are an essential tool for any financial market. He was largely responsible for designing software that facilitated data transfer between a nationwide credit bureau, the Government and industry-related companies in South Africa. The project, carried out in the early 1990s and lasting almost 10 years, was a mammoth task involving retailers and banks that sought access to people's credit information.

Mr Green, who has been in the UAE for almost two years, reckons an established bureau would be a great asset to the UAE. "Those that deserve finance will get it quickly," he says, explaining how a credit bureau would benefit the country's residents. "There are many people who deserve good financing that aren't getting it. You will always get people who shouldn't have financing, so this [credit bureau] will cut the two out and quickly establish high and low risks."

A credit bureau will also alleviate pressure on local banks that still apply simple criteria, such as an individual's basic salary, when assessing loan or bank account applications. "The banks are still rigid in their selection process," Mr Green says. "If you're in the UK, they would look at it from a much broader perspective. Here, they are too nervous to make a decision and they would rather say no. As much as you try and convince the credit manager to change his thinking, the fear of risk in his mind is too big."

While it is believed a credit bureau will improve the UAE's financial landscape, the co-operation of other institutes is also required. New rules allowing people who have lost their jobs amid the economic downturn more time to pay off debts is essential, according to Ms Butterworth. In particular, she believes restrictive visa and redundancy rules have to be addressed. "One problem we have is the visa laws. If you don't have a job you have a month to get out and your employer has to contact the bank to say 'we have got rid of this person'," she explains. "In the heyday [before the downturn], if you missed two or three payments the banks were never too worried, but now if you miss one and can't pay they go straight go to immigration.

"You basically go to jail until the situation is rectified, but if you have lost your job and can't pay, what are you going to do? People who can't pay will try to abscond before that payment is due. Visa and redundancy laws have to be looked at." But even if new visa laws are introduced alongside an efficient credit bureau, Ms Butterworth thinks it would take time for both to undo the financial mess created by local banks. "They must stop trying to throw money at people who can't afford to pay it back," she states.

"One thing I have noticed is that banks gave out credit cards and loans to almost anyone and when these people defaulted and left the country the banks raised the mortgage rates. We have friends that suddenly need to find an extra Dh5,000 a month for their mortgage because of the banks' greed. The poor people left behind are being penalised."